ICU Weekly Insight: 13 February 2023

The Ministry of Finance continues to offer "reserve" bonds in limited volumes. At the same time, and for the second week in a row, foreigners continued to sell UAH-denominated bonds.

Last week, the Ministry of Finance sold another UAH5.5bn of "reserve" bonds, although demand was in excess of UAH32bn. Demand for other UAH instruments was low. See details in the auction review.

Over UAH12bn of local-currency bonds will be redeemed this week, so the MoF plans to offer four UAH-denominated bills tomorrow, including a "reserve" bond with a volume cap of UAH7bn. The refinancing of the larger part of the upcoming redemptions should be guaranteed.

The volume of trades in the secondary market decreased sharply to UAH3.5bn. The largest share of trades, for UAH1.8bn, was nothing but a resale of "reserve" bonds after the auction. Another UAH1.4bn was the trade in bills maturing in 2025–2026, of which foreign investors have a large holding. At the same time, foreigners likely (surprisingly) abstained from buying securities with maturities after April 1, when they will have the opportunity to repatriate the redemptions, and the volume of trades in bills with maturity in April and May this year fell to UAH160m.

Over the past week, banks increased their portfolios of UAH bonds by UAH5.3bn thanks to "reserve" bills. Non-banking institutions and individuals also continued to grow their portfolios steadily albeit in small volumes, and foreigners reduced their portfolios by UAH248bn.

ICU view: Banks are primarily interested in "reserve" bills so as to invest the required reserves into interest-earning assets. Hence, the demand for this paper will significantly exceed supply. But the Ministry of Finance will continue to sell such bills in small amounts and is unlikely to revise the offered amount tomorrow. Therefore, as in previous weeks, competition among bidders is expected to be high, and some may lower the interest rates in bids. Therefore, the MoF will be able to refinance more than half of this week's redemption with this bond.

Foreigners are likely among the owners of the bond that MoF redeems this week. We do not expect them to be active in the primary auction, and most likely, they will try to buy bonds maturing in April or shortly thereafter to be able to repatriate their funds. At the same time, last week’s most actively traded bonds were those maturing in 2025 and 2026, and may have been the sell-off by foreign investors.