Ukraine’s government bonds have surged in price over the past two months as investors grow more optimistic about how much of their money they will get back in an eventual restructuring of the war-torn country’s debt.
Kyiv’s debt tumbled following Russia’s invasion in February 2022, and prices sank further still after overseas creditors voted in favour of freezing interest payments on the country’s $20bn of international bonds.
But prices have climbed by more than 50 per cent since early June — putting Ukrainian bonds among the best performers in global fixed income markets this year — as a steady flow of foreign aid bolsters Kyiv’s currency reserves, while forecasts for the country’s economy have recently become somewhat less bleak.
“The market is trying to work out: when we do finally have the restructure, what level will the bonds trade at?” said Daniel Wood, an emerging markets portfolio manager at William Blair.
“Any piece of good news — growth, a high level of foreign exchange reserves, a deal with the IMF — will be treated well by investors, because that means the recovery value of [Ukraine’s] bonds will be higher than the market is currently pricing,” he noted.
Kyiv’s foreign reserves have climbed to an all-time high of $41.7bn as financial aid from western countries continues to flow, according to central bank data published earlier this week.
Investors say that the IMF’s review in June of its four-year $15.6bn loan programme to Ukraine, which allowed Kyiv to immediately withdraw $890mn for budget support, has also helped fuel the recent rally.
The IMF had signalled at the end of June that Ukraine’s economy is set to grow by between 1 and 3 per cent in 2023, upgrading earlier forecasts that pointed to a 3 per cent contraction this year. Russia’s invasion caused Ukraine’s GDP to fall 29 per cent last year.
With the conflict dragging on for more than 18 months, Ukrainian debt continues to trade at levels that imply a restructuring is a certainty and creditors will receive a harsh writedown of the value of their bonds. But the market’s assessment of how much investors are likely to recover has risen.
A dollar-denominated bond maturing in September 2025 currently trades at 31 cents on the dollar, up from 20 cents in early June. Other foreign currency bonds have chalked up similar gains.
The biggest holders of Ukraine’s international bonds are BlackRock, Pimco and Fidelity, according to filings data.
“It’s a pretty good return in two months,” said Giancarlo Perasso, the lead economist at PGIM fixed income, which also holds some Ukrainian debt.
“We were thinking of a certain haircut, but now we think the restructuring might be more favourable to us because the country has a higher capacity to pay than we thought before,” Perasso added.