Ukraine Bonds With No Early Payouts Gain on Reconstruction Bets
(Bloomberg) -- A Ukrainian sovereign bond offering investors zero dollars in cashflow until 2027 is increasingly becoming a favorite pick among investors.
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A wide array of Ukrainian securities have persistently led emerging-market rankings since Donald Trump won the race for the White House. The gains have been fueled by bets that a ceasefire in the war against Russia’s invasion may move closer after he takes over the US presidency.
Within the bond rally, one type of security has stood out. One of the sovereign notes maturing in 2035 is trading at around 59 cents on the dollar, 10 cents higher than before Trump’s victory. Bonds that mature the same year but kick off interest payments sooner are pricing relatively lower at 54 cents.
The reason behind that trade is linked to a feature introduced in the so-called “B bonds,” which would trigger larger capital payments if the economy recovers more than what the International Monetary Fund predicts. Those expecting an eventual halt in the fighting see that as a step toward reconstruction efforts, which would trigger an upswing in Ukraine’s economy.
International diplomatic activity has already kicked off, though a start of negotiations between Russia and Ukraine would still face formidable obstacles due to differences between the two sides on a series of issues including territorial demands and Kyiv’s aspirations to joint NATO.
Kyiv and its allies are doubtful Russian President Vladimir Putin wants to end fighting as his army is gaining slowly in the grinding war, while Trump has not shown any plan how to force a ceasefire.
Ending the Conflict
Bank of America has had a buy recommendation for these bonds since Nov. 7, said credit strategist Merveille Paja, as they offer a “best risk reward across the curve.”
Morgan Stanley in turn has stayed neutral on Ukraine overall, though that bank also sees “more upside” in the “B bonds” that mature in 2035 and 2036, according to a Dec. 9 report.
“The key driver is now any scope for a ceasefire that would bring the conflict to an end,” the Morgan Stanley report added.
Blackrock Inc, Royal Bank of Canada and Allianz SE are among the largest holders, according to data compiled by Bloomberg.
Profit Taking
The rally in the B bonds maturing in 2035 and 2036 has generated a more than 40% return since the bonds started trading at the beginning of September, after a $20 billion debt restructuring, according to data compiled by Bloomberg.