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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Ukraine sells war bonds, but foreign demand is not tested
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Ukraine sold $270 million worth of "war bonds" in local currency. Yet, foreign appetite remains untested. The country might have a brief window of opportunity to test foreign demand before volatility intensifies in bond markets.
Ukraine pays USD bond coupons and issue war bonds.
As Ukraine is fighting to keep Russian troops at bay, the bond market is surprised by the commitment of the ministry of finance to secure the settlement of budgetary payments. Yesterday, Ukraine's US dollar bonds with maturity in September this year received $290m worth in coupon payments. A default was not an option for the ministry of finance because, as history showed, the restructuring of Ukraine’s debt in 2015 hindered Ukraine's access to the debt market for a long time.
On the same day, Ukraine sold $270 million worth of “war bonds” in local currency with a coupon of 10% and 11% and maturity two months and one year, respectively. The bond sale happened despite Russian troops advancing towards Kyiv, and the central bank imposed capital controls, making it difficult for foreign investors to participate in the auction.
According to the finance ministry, this is not the last war bond sale we'll see. However, the big question is whether Ukraine will issue short-term hard currency bonds, which would attract the attention of a much wider audience of foreign investors. Whether overseas investors would or would not participate in such an auction depends on the yield offered by the bonds and the risk appetite in that specific moment in time.
Even if Ukrainian bonds plunged since Russia started the conflict, they are much better positioned than Russian peers. The Russian market is totally paralyzed following the latest sanctions, with most banks and brokers offering to sell Russian bonds only, killing demand as a whole.
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