(Bloomberg) -- Emerging-market investors are beginning to question how much more upside exists in Ukraine’s bonds as NATO allies begin to clash over the nation’s future.
US and Russian officials started meeting in Saudi Arabia on Tuesday to discuss how to end the war in Ukraine, without anyone from Kyiv taking part and Europe struggling to respond. The limited role for Europe in the negotiations, with the US potentially approving permanent Russian control over some occupied territories, is making the process unpalatable for Ukraine.
That’s seen as negative by the market as the prospect of a deal recedes, said Timothy Ash, senior EM sovereign strategist at RBC BlueBay Asset Management.
“I believe Ukraine will likely walk away from the deal, which means the war is unlikely to end anytime soon — a negative outlook for Ukraine bonds,” Ash said.
The bullish expectations prevalent until recently made Ukraine’s debt some of the best-performing assets since last year. The government’s dollar bonds returned close to 60% in 2024 and another 11% already this year, according to data compiled by Bloomberg. Some are now asking if that pace is sustainable.
On Tuesday, Ukraine’s dollar bonds were among the worst performers across emerging markets, with zero-coupon notes due in 2030 slipping 1.5 cents on the dollar to about 59 cents.
“We think we are getting to a stage in the bond rally where the details of any peace deal will start to matter,” said Thys Louw, a portfolio manager at Ninety One UK Ltd. “The easy trade is done.”
Type of Deal
EU leaders were left shocked by Trump’s push to begin direct talks with his Russian counterpart Vladimir Putin last week. Yet many investors still believe that positive momentum could persist in the market, regardless of how much Ukraine or Russia stands to lose and gain from the outcome.
“The bond market is probably fairly agnostic about the type of deal on offer,” said Kieran Curtis, a director at Abrdn Investments. “A deal that stops the fighting and associated costs will be good for the bond market almost by definition.”
Ukraine’s securities linked to economic growth have been doing especially well. GDP warrants, one such type of instrument, were trading just under 86 cents on the dollar, about two cents off the highest levels since before Russia’s full-scale invasion of Ukraine in 2022.
Kaan Nazli from Neuberger Berman said he is skeptical of the long-term performance of Ukraine’s bonds despite being positive in the shorter term.
“Focusing more on the medium term, further integration with and potential EU accession is crucial,” Nazli said. “As an investor I would be watching what a deal means for those objectives - a Georgia-type return to a semi-authoritarian government and controversial elections will clearly pull the country to the other direction.”
(updates with bond performance, Tuesday’s talks in Riyadh)
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