Ukrainian bonds extend longest rally in almost a year

Ukrainian benchmark bonds extended the longest rally in almost a year after the nation won International Monetary Fund aid to avert a default.

The dollar-denominated bonds due April 2023 have risen for nine straight days, pushing the yield down 2.13 percentage points to a two-month low of 8.78 percent 4:21 p.m. in Kiev. That caps the longest stretch of gains since the notes were sold last April. Ukrainian notes maturing in June traded at 97.80 cents on the dollar, up 6.8 cents in the past 12 days as speculation that Ukraine will get a bailout eased concern it won’t have funds to pay the $1 billion security.

International lenders will provide $27 billion after Ukraine takes steps to stabilize its economy, the IMF said in a statement yesterday. Societe Generale SA said Ukrainian Eurobonds marked its “largest overweight call” after raising the debt from neutral yesterday, as the IMF pledged to keep the nation afloat over the next two years.

The IMF deal “unlocked the highly desired support of the EU and the U.S. to develop the Ukrainian economy and prevent default,” Alexander Valchyshen and Taras Kotovych, analysts at Investment Capital Ukraine in Kiev, said in an e-mailed note today. “If the Ukrainian parliament adopts other drafts of the law to improve the Ukrainian economic situation, yields should continue to decline further.”

The government signed a political pact with the European Union on March 21, after the ouster of President Viktor Yanukovych prompted Russia to stop lending to its former Soviet vassal state and annex the Crimea region.

Currency Slump

Ukraine has agreed to reduce its budget deficit to 2.5 percent of gross domestic product by 2016, raise retail energy prices, maintain a flexible exchange rate and address banks’ bad loans, according to the IMF statement. The deficit was 4.4 percent of GDP in 2013, the ministry said earlier this week.

The country is “on the edge of economic and financial bankruptcy” and must adopt “very unpopular” reforms to shore up its finances, Prime Minister Arseniy Yatsenyuk said yesterday. GDP will shrink 3 percent and inflation may reach 12 percent to 14 percent this year, he said.

The hryvnia, which gained 0.8 percent yesterday after the IMF deal, slid 1.7 percent today to 11.25 per dollar, approaching its record-low of 11.325 reached on March 26. It has lost 27 percent this year, the most among all currencies tracked by Bloomberg, as the central bank abandoned a peg to the dollar after foreign reserves fell to an eight-year low.

“The IMF program news is slightly better than expected,” Fyodor Bagnenko, a fixed-income trader at Dragon Capital in Kiev, said by e-mail yesterday. “A two-year program also means an accelerated path of disbursements and fairly quick economic reforms, which will likely be preconditions for each tranche.”

‘Weak Economy’

Ukraine’s currency will weaken to 12.62 per dollar in the next 12 months, according to trading in non-deliverable forward contracts. The Ukrainian Equities Index fell 1.7 percent.

“There is still further scope for currency weakness,” Thu Lan Nguyen, a Frankfurt-based foreign-exchange strategist at Commerzbank AG, wrote in a research note to clients today. “A tighter fiscal policy as well as rising energy prices will put pressure on an already weak economy.”

U.S. officials have warned that Russia is amassing troops along the border of Ukraine, raising concern it may be preparing to carve off other parts of its western neighbor.

“This is the first time since Ukraine won independence in 1991 that a credible western external policy anchor for reform is being put in place,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail today. “The problem, however, is that Russia objects to Ukraine being drawn into the western fold, while Russia-leaning eastern Ukraine remains extremely unstable and hostile towards Kiev.”

‘Political Risks' 

The bond rally over the past two weeks shows investors had anticipated the IMF will announce a bailout deal, limiting the scope for further gains, according to Barclays Plc.

“Political risks are likely to remain elevated and could flare up, particularly in eastern Ukraine,” Barclays’s London- based analysts Andreas Kolbe, Eldar Vakhitov and Stella Cridge wrote in a report yesterday. “We are reluctant to turn positive on longer-dated Ukraine bonds and would not be surprised to see some profit-taking by investors.”

Investors have been buying Ukrainian bonds while ditching Russian debt amid speculation the U.S. and EU will levy further sanctions against the regime of President Vladimir Putin. Russia faces a growing risk of recession as a hemorrhaging of $100 billion in capital this year may bring the economy to a near standstill, according to analysts and government officials.

The extra yield on Ukraine’s 2023 notes over comparable dollar-denominated securities from Russia fell to a record-low 3.61 percentage points today, data compiled by Bloomberg shows. The spread has shrunk from as high as 6.73 percentage points on Feb. 19, when concern peaked that Ukraine could default.

“Russia is unlikely to intervene in the eastern part of Ukraine as we think that Putin may focus on restoring the investors’ confidence to avoid recession,” Regis Chatellier, London-based director of emerging-market strategy at Societe Generale, wrote in a note yesterday. “As geopolitical uncertainties ease in the region, we believe, Ukrainian assets should substantially outperform.”

 

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