Eurobond yield growth spurs exit of nonresidents from govt bonds, indirectly forms pressure on hryvnia – bankers

KYIV. Jan 21 (Interfax-Ukraine) – The eurobond yield growth stimulates the withdrawal of nonresidents from government domestic loan bonds and indirectly forms the main pressure on the hryvnia, bankers interviewed by Interfax-Ukraine believe.

“The increase in the sale of eurobonds led to a drop in their price and an increase in the yield… Amid the above factors, since the beginning of the year, nonresidents have reduced their government bond portfolios by UAH 5.7 billion, as a result of which the yield rates on the secondary government bonds have increased. In the foreign exchange market, it is nonresidents who form the main pressure on the hryvnia,” Director of the Treasury and Investment Services Department at Ukreximbank Anton Boldyrev said.

According to him, the current increase in rates on Ukrainian eurobonds is caused by increased geopolitical tensions around Ukraine and the relatively low liquidity of the eurobond market. In particular, the increase in the sale of eurobonds led to a drop in their price and an increase in the yield from 6 p.p. in early December to the yield above 20 p.p. on the short segment of the curve (maturity September 2022).

At the same time, Boldyrev expects that with normalization of the geopolitical situation and the information background, profitability will quickly return to December levels.

In turn, Director of the Treasury Department at Unex Bank Hanna Zolotko notes that the growth in the yield on Ukrainian eurobonds does not have a direct impact on the domestic borrowing market, but this process indirectly affects several directions at once.

“The first and most obvious conclusion is that in the current conditions the international capital market is completely closed for us. There can be no question of issuing any new bonds. There are simply no buyers for them now,” the expert pointed out.

In addition, the yield of sovereign bonds is perceived by markets as one of the key indicators of risk in the country as a whole, which is read and causes an appropriate reaction of investors, which is manifested, among other things, in the withdrawal from domestic debt instruments. In particular, since the beginning of the year, the portfolio of government bonds of nonresidents has decreased by UAH 5.9 billion, which has a double impact on the market.

“Often, Ukrainian banks act as buyers of this debt in the secondary market. Part of it ends up in the portfolios of individuals and legal entities. Among other things, this means that the Ministry of Finance has a narrower opportunity for new borrowings in the domestic market – part of the potential demand is redirected to the secondary market, where, amid sales of securities by nonresidents, you can get the higher yield,” Zolotko explained.

According to her, as a result, this forces the Ministry of Finance to resort to raising rates in the domestic market and, in general, increases the cost of public debt.

At the same time, she noted that it is not entirely correct to talk about such an effect in a short time period, since the situation can unfold at any moment and the high yield of Ukrainian securities will lead to the opposite effect.

“For example, nonresidents, who are well acquainted with Ukrainian seasonality, are especially active in hryvnia-denominated government bonds at the beginning of the year, when the US dollar is at its peak. This tactic allows them to receive additional profitability on exchange rate differences,” Zolotko explained.

The Director of the Treasury Department at Unex Bank added that although the news background does not allow talking about any inflow of investments, in the event of de-escalation, everything can change very quickly and the pass-through effect on lending rates will be minimal.