Ukraine Short Sellers Bail on Losing Bond Market Wagers

Short sellers are abandoning money-losing wagers on Ukrainian bonds as signs of improving relations with Russia trigger the longest streak of gains in four years.

Money managers have cut their short positions on the country’s dollar bonds by 23 percent to $655 million this month after lifting them more than 100 percent to $846 million in the year through April, according to Markit, a London-based provider of financial information. Ukraine’s bonds have surged an average 7.3 cents this month to 93 cents on the dollar, Bank of America Corp. index data show.

Bearish investors are capitulating as the election of President-elect Petro Poroshenko, who pledged to seek an end to fighting with rebels, and signs Russia is seeking to defuse tensions damp concern the former Soviet republic is heading toward default. Short sellers had piled up bets against the bonds, taking on bullish investors led by Franklin Templeton’s Michael Hasenstab, as clashes with separatists fueled speculation Ukraine was on the verge of civil war.

“Ukrainian assets are likely to outperform as the crisis remains geographically contained and does not spread to other regions,” Societe Generale SA’s Regis Chatellier, who raised the country’s bonds to overweight from neutral, said yesterday in an e-mailed report. “Our base case scenario is also that Russia will not directly intervene due to potential sanctions.”

Wagers on declines in the value of Ukraine’s obligations had reached a one-year high of $863 million in March before starting to drop, according to Markit.

Franklin Templeton

The market value of Bank of America Corp.’s U.S. Dollar Ukraine Sovereign Index has climbed $1.2 billion to $14.9 billion this month. The rally has proven a boon for Hasenstab, who oversees Franklin Templeton’s global bond group.

Hasenstab, the fixed-income manager known for making contrarian bets on nations including Ireland and Hungary, boosted Franklin’s wager on Ukraine in the first quarter to $7.6 billion, according to data compiled by Bloomberg.

“I’m more excited about Ukraine today even than I was a year ago,” Hasenstab said May 22 at San Mateo, California-based Franklin’s Investor Day. “This transition government has done an exceptional job of using a crisis to make a lot of really tough reforms. Three years or five years from now that crisis is actually going to have improved the credit because of the reforms.”

Rising Costs

The yield on Ukraine’s $2.6 billion of 9.25 percent bonds due 2017 tumbled 21 basis points to 9.52 percent yesterday. Yields climbed 0.15 percentage point to 9.67 percent at 10:02 a.m. today in New York. Investors have pared short bets on the securities to $181 million in nominal value, from as much as $256 million in March, Markit data show.

The cost for short sellers to borrow the bonds for one year has climbed to 1.5 percent, versus an average of about 0.3 percent for European government bonds, the data show.

European Union policy-makers meeting in Brussels on May 27 decided to put off further sanctions on Russia after President Vladimir Putin showed a willingness to work with Ukraine’s new leader and pulled back some troops from the Ukrainian border.

Ukraine’s “presidential elections helped to give hope,” Ogeday Topcular, who oversees $300 million of assets at RAM Capital SA in Geneva, said in an e-mailed response to questions. “I’m still expecting volatility for Ukrainian assets as well as for its political and economic situation, but I know there are investors out there believing the worst is over.”

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