Ukraine’s Bonds Fall Most in Four Months as Fighting Intensifies

Ukrainian Eurobonds fell for a seventh day, dropping the most in more than four months, as fighting spread in what Petro Poroshenko called a “de facto” Russian incursion.

The yield on dollar-denominated notes due in July 2017 jumped 128 basis points to a three-month high of 12.21 percent by 5:56 p.m. in Kiev. The rate has climbed 248 basis points in seven days, the longest such streak in nine months. The Ukrainian Equities Index fell 6.2 percent, the biggest decline since Russia’s incursion into Crimea began at the start of March, while the hryvnia gained 0.7 percent to 13.5 per dollar.

Pro-Russian rebels widened attacks, taking several towns, including those near the Sea of Azov, opening a new front and a seaborne supply channel for the separatists, said Anton Herashchenko, an adviser to Ukrainian Interior Minister Arsen Avakov. JPMorgan Chase & Co. and Nomura Holdings Inc. recommended investors cut holdings of Ukrainian debt, citing the conflict’s impact on the economy and the fading prospect of a diplomatic resolution.

“The Ukrainian economy is already in a fragile position given the sharp economic contraction and a worsening economic outlook,” JPMorgan analysts including Michael Marrese and Nicolaie Alexandru-Chidesciuc said in an e-mailed report. The escalation of fighting “could exacerbate the situation in the months ahead,” they said.

‘Sharp Deterioration’

Poroshenko canceled a state visit to Turkey to coordinate the country’s military response to the “sharp deterioration” of events in rebel-held territory, he said on his website today.

Russia may be directing the attacks as the fighting spread to previously peaceful areas, the U.S. said yesterday, falling short of calling it an invasion. France and Germany threatened President Vladimir Putin with tougher sanctions.

Russian President Vladimir Putin met Poroshenko this week and hailed the talks as a step toward a resolution. Putin said conditions for a cease-fire weren’t discussed because Russia isn’t a party to the conflict.

JPMorgan cut its recommendation on Ukrainian debt to a “small” underweight from marketweight, saying the position is small due to the unpredictable nature of the crisis. The economy will shrink 7.8 percent this year and 5.2 percent in 2015, according to the bank’s latest forecast.

Worst Performance

“The invasion by Putin of the regular Russian army is a fait accompli,” Ukraine’s Herashchenko said on his Facebook page today. The Foreign Ministry in Lithuania said it “strongly condemns the invasion of Ukrainian territory by Russian Federation military forces, which has obviously begun.”

Ukraine’s dollar-denominated bonds have lost 3.8 percent this month through yesterday, the worst performance among 14 eastern European countries in the Bloomberg Dollar Emerging Market Sovereign Bond Index (UX) and the only decline except for a less than 0.1 percent drop for Armenian debt.

Nomura added to its underweight position on Ukrainian credit citing the growing cost the conflict is imposing on the economy, analysts including Peter Attard Montalto and Dmitri Petrov in London wrote in an e-mailed report today.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Stephen Kirkland, Daliah Merzaban

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