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Analyzing the preference for dinar-denominated bonds over euro-denominated Ones

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In the Serbian debt market, an intriguing trend has emerged over the past month. While bonds denominated in dinars have been completely sold out, the success rate for those in euros was less than fifty percent. In early March, the government reopened the issuance of bonds from October of the previous year, valued at 150 billion dinars. These bonds mature over eight years with an annual interest rate of six percent, achieving a one hundred percent sales success rate. However, only slightly over 2.8 billion dinars from this issuance remain unsold.

On the other hand, in early April, the government also reopened the issuance of bonds denominated in euros from January of the current year, initially valued at 250 million euros. With an annual interest rate of four percent, the bonds saw a sales success rate of 44 percent, as only 67 million euros worth were sold. Depending on investor interest, the government plans to repeat the sale of these bonds to raise an additional 150 million euros.

What accounts for this difference in investor interest? Economist Ivan Nikolić, editor of “Macroeconomic Analyses and Trends” (MAT), suggests that investors perceive the dinar as stable with its value unlikely to significantly fluctuate in the near term. Hence, they prefer to invest in assets offering higher returns, even if it means buying bonds denominated in dinars instead of euros.

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From an investor perspective, Nikolić notes that current bond prices represent the peak, signaling the last opportunity to capitalize on them, as global benchmark interest rates are expected to gradually decrease. This anticipated monetary easing by central banks of major economies would inevitably impact bond yields.

The National Bank of Serbia recently announced progress toward the historic goal of obtaining an investment-grade rating. While Serbia’s credit rating remains at BB plus, just below investment grade, agencies like Standard & Poor’s have improved prospects for an upgrade within the next year. Nikolić believes this could result in more favorable borrowing conditions for the country by the year’s end.

However, he emphasizes that an investment-grade rating alone does not guarantee cheaper borrowing. Despite this, Nikolić points out that Serbia’s borrowing costs are comparable to or even lower than some European Union member states, attributing this to various factors such as political stability and economic performance.

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