Ukraine Bond Selloff Deepens as Invasion Threat Exposes Risks

Russia-Ukraine Tensions Spill Over Into Markets
  • Government’s 2019 Eurobond heads for worst week since May
  • Prior to escalation, Ukraine bonds touched record highs

The rout in Ukrainian assets worsened, with the nation’s restructured bonds heading for their worst week since May, on concern a flare-up in fighting between government troops and separatists in the country’s east may be a precursor to a full-blown conflict.

The yield on the government’s $1.7 billion Eurobond due 2019 rose 15 basis points to 8.51 percent by 4:16 p.m. in Kiev, bringing the increase this week to 44 basis points. The hryvnia currency slumped toward to the weakest level in three months after President Petro Poroshenko warned on Thursday of a possible invasion by Russia.

Building tensions between Ukraine and Russia are exposing the risks that global investors have taken by chasing higher-yielding assets to escape near-zero rates in much of the developed world. The day before Russian President Vladimir Putin accused the government in Kiev of sending saboteurs to Crimea on Aug. 10, Ukraine’s sovereign bonds rallied to the highest level since they were restructured in a $23 billion debt revamp last year.

“Ukraine’s Eurobonds may become more sensitive to possible escalation of the conflict," said Gintaras Shlizhyus, an analyst at Raiffeisen Bank International AG in Vienna, who said he’ll revisit a hold recommendation for the notes if the escalation continues. Despite the recent declines, investors seem complacent about the news in the country’s east, he said.

The nation’s dollar-denominated debt has handed investors losses of 2.9 percent since Putin’s comments, the most of any developing nation in a Bloomberg sovereign bond index. Prior to then, they returned 16 percent in 2016. The hryvnia, which is underpinned by the National Bank of Ukraine’s currency controls, dropped 0.8 percent this week to 25.2394 per dollar.

Junk Credits

Following the selloff this week, Ukraine’s sovereign debt now carries the third-highest yield after Ghana and the Republic of Congo among peers rated six steps below investment grade at S&P Global Ratings.

Putin’s annexation of the Black Sea Crimean peninsula in March 2014 prompted the worst standoff between Russia and the U.S. since the Cold War, and the separatist fighting that ensued in Ukraine’s easternmost regions drove its economy into recession and forced the government to turn to the International Monetary Fund for a bailout. Russian President Vladimir Putin arrived in Crimea on Friday to convene a meeting of his Security Council, his first visit to the disputed territory since March.

Warrants issued under a restructuring last year, that promise to pay holders if the size of the economy exceeds $125.4 billion, have lost a seventh of their value since mid-July, falling 1.3 cent to 30.83 cents on the dollar this week. The $90.5 billion economy expanded by an annual 1.7 percent in the second quarter, the fastest pace since 2013, according to official data published Monday.

Poroshenko’s “aggressive rhetoric is clearly negative for the market as some market participants might prefer to avoid the entire situation, regardless of the outcome,” said Vladimir Osakovskiy, an economist at Bank of America Corp. in Moscow. It’s unlikely Ukraine will want to enter a new round of full-scale military action, he said.

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