Ukraine Bonds Trade Like Crimea Never Happened Amid Yield Hunt

  • Dollar-debt yield falls below 8% first time since January 2014
  • Prime Minister’s appointment sidestepped new crisis this year

The global search for bond returns has pushed Ukrainian government debt to highs not seen since before the first bullets were fired amid anti-government protests in Kiev’s central square more than two years ago.

The yield on the country’s three-year dollar debt fell below 8 percent on Monday for the first time since January 2014, before the ouster of pro-Russian President Viktor Yanukovych and the annexation of Ukraine’s Crimean peninsula. Yields have tumbled more than four percentage points and the local currency has rallied since the peak of a government standoff in February this year before the appointment of a new prime minister diffused a fresh political crisis.

The rally signals investors are wagering on the country’s recovery after a $15 billion debt restructuring last year and as the government edges closer to unlocking the next payment in a $17.5 billion bailout from the International Monetary Fund. Investors worldwide are also looking for higher-yielding assets at a time when bets for a new bout of central bank stimulus push almost $10 trillion in securities tracked by Bloomberg to yield less than zero.

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"Ukraine looks attractive in the ongoing search for yield," said Fyodor Bagnenko, a managing director for fixed-income trading at Dragon Capital in Kiev, who says the nation’s Eurobond market is dominated by international investors. "The country is moving toward receiving the next tranche of IMF funds as well as $1 billion covered by a U.S. government guarantee."

Debt Writedown

The yield on Ukraine’s dollar-denominated bonds maturing 2019 increased 17 basis points to 7.88 percent by 6:39 p.m. in Kiev, rising from the lowest for three-year borrowing costs since January 2014. The hryvnia, which is supported by the central bank’s capital controls, was little changed at 24.8325 per dollar, leaving it 8.3 percent stronger than at the end of February.

The pro-European Union protests in the capital’s Independence Square, known as Maidan, more than two years ago led to the toppling of Yanukovych’s government and spurred a separatist insurgency, pushing the country to the brink of default and forcing a restructuring that took Ukraine’s bonds to trade as low as a third of their face value. The deal included compensation for a 20 percent reduction to principal via warrants that tie payments to the nation’s economic performance.

Slowing consumer-price growth is also signaling recovery and boosting chances the central bank will cut its benchmark rate, currently at 16.5 percent, for a fourth consecutive month when it meets on July 28. Inflation slowed for a seventh month to 6.9 percent in June.

Policy makers have stepped up dollar purchases that helped boost sovereign reserves more than twofold to $14 billion last month from as low as $5.6 billion in February last year. The IMF may unlock as much as $4 billion this year under the country’s bailout, Prime Minister Volodymyr Hroisman said in an interview earlier this month.

While Vladimir Miklashevsky, a senior strategist at Danske Bank A/S in Helsinki, doesn’t recommend holding the notes given the possibility for political turbulence to return, he said some investors may be tempted.

"Ukraine’s economy is starting to look better on the extremely low base effect in 2014 and 2015, while geopolitical tensions have stayed away," he said. "I see this moment as a window to benefit from high yields on lower risk. Any geopolitical escalation would quickly close that window."

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