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Bond Market Insight-Weekly review: MoF loan to VTB, UKRINF new bond issue, and Boryspil 1Q11 results

The past week was marked by a significant shake-up in investors' attitude toward investments into riskier assets, including Ukraine's foreign debt. Despite initial fears arising from S&P's statement on lowering its view on the US sovereign credit rating, raising the a likelihood of a rating downgrade in the next two-year period, investors' reaction to this news abated quite quickly early on last week. Instead, a risk-on attitude returned to the markets, sending prices on Ukraine's US dollar debt into recovery. Thus, the yield on Ukraine's benchmark 10-year sovereign Eurobond due in 2020 fell by 3bp to 7.13% over the week, while the yield on the short-dated bond due in 2013 rose 11bp, to 4.49% flattening the yield curve. The CDS spread on Ukraine's 5-year sovereign debt was at 426bp last Friday, barely changing over the week.

Local currency. ICU's trade-weighted indices of the UAH again declined (weakened) over the past week, as nominal weakness of the currency of mediocre calibre was magnified by the nominal strength of the RUB and EUR, the currencies of Ukraine's main trading partners. This week's Fed decision on monetary policy is likely to add additional weight on the divergence between monetary stances in the US and a number of DM and EM economies, where the ongoing fight with inflation takes priority. Hence, in our view, the UAH peg to a weak USD will extend its weak profile a bit further.

Domestic bond market. In the domestic bond market, we underline once again that the banking sector, the main buyer of local-currency bonds, has been on the rise, reaching more than UAH38.2bn as of end of past week, UAH1bn short of the 3-month high seen back in mid-1Q11. This allows the MoF to recycle this liquidity into government debt; this week's auction is likely to again draw sizable attention to the long-dated bond, as buyers will be looking for yield. The previous week's bond auction brought sizable proceeds, totaling UAH 2.6bn, and the yield on the 2-year bond was cut by 20bp to 9.4%. The MoF is likely to count on a similar shift during today's auction. In the corporate bond market, we comment in this report on the 1Q11 financial filing by International Airport Boryspil. When this corporate issuer tapped the local market last December with a one-year bond at a coupon rate of 16%, a close circle of investors bought into the bond. The airport has a sizable capital expenditure programme financed largely by government, but occasionally, the company turns to the capital markets for financing. In our view, it has one of the strongest credit profiles among the Ukrainian non-bank corporate issuers of bonds.

Eurobond market. In the Eurobond market section of our weekly report, we provide our comments on the government's possible resolution to the US$2bn loan from VTB which is due this June, though it has a one-year extension option. The past week's bond issue by state-owned Financing of Infrastructural Projects and the upcoming bond by the city of Kiev are included the review, as well.

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