Ukraine Bonds Soar With Stocks on Political Solution Speculation

Ukrainian bonds rebounded from a record low and equities erased declines as European Union sanctions added to pressure on President Viktor Yanukovych to find an end to violence that has killed at least 64 people.

The yield on the government’s $1 billion of notes due in June tumbled 12 percentage points from a record to 30 percent by 7:41 p.m. in Kiev. The notes slumped the most on record yesterday as the deadliest clashes in the three-month standoff overshadowed Russia’s decision to resume a $15 billion bailout plan put on hold last month.

EU foreign ministers agreed on the need “to look at targeted sanctions,” Catherine Ashton, the bloc’s foreign policy chief, said today in Brussels. The move comes after Kiev’s mayor quit Yanukovych’s party over the unrest and lawmakers in Lviv on the Polish border established an autonomous government and declared allegiance to the opposition.

“The full court press by the European governments and sanctions may be leading investors to suggest that the endgame may be approaching more rapidly than expected,” Richard Segal, a strategist at Jefferies International Ltd. in London, said by e-mail today. The moves today “can be a technical correction after such a sharp drop yesterday,” he said.

The yield on the 2014 debt soared 19 percentage points yesterday as the bloodiest clashes since the three-month standoff began prompted Poland to warn that its eastern neighbor may be on the brink of civil war.

Violence Today

A truce between Yanukovych and the opposition last night fell apart as violent skirmishes today in Independence Square, the hub of the demonstrations, took the death toll since Feb. 18 to 64, according to Health Ministry figures. Aside from Lviv, protesters seized government and security headquarters in at least four other regions.

Ukraine’s equity gauge climbed 3.9 percent today, reversing a drop of as much as 3.4 percent. The hryvnia, which is managed by the central bank, was unchanged versus the dollar after weakening earlier. Currencies in developing Europe recovered from losses, with the Hungarian forint strengthening 0.6 percent against the euro and Turkey’s lira advancing 0.5 percent versus the dollar.

‘Political Solution’

“The threat of regions to push for independence from Ukraine and party defections from top politicians put so much pressure on the president that we will have a political solution sooner than later with a new government,” Lutz Roehmeyer, who manages $1 billion at Landesbank Berlin Investment and holds the 2014 bonds, said by e-mail.

Unrest has worsened in the country of 45 million as the Russian-backed leader’s security service conducts a nationwide anti-terrorism operation to end the uprising. Demonstrations started in November over Yanukovych’s decision to end trade talks with the EU in favor of closer ties with Russia, which opposed the deal.

Ukraine needs financial aid to avoid defaulting on the $17 billion of liabilities it has coming due through the end of 2015, including the $1 billion note maturing in June, according to data compiled by Bloomberg. The rate on the government’s 2023 bonds fell 33 basis points to 11.09 percent today.

“Unless you see the country completely coming apart at the seams which would be civil war, it’s not a bad time to step in,” Hans Humes, New York-based chief executive of Greylock Capital Management LLC, said in an interview with Bloomberg Television today.

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