(Bloomberg) -- Fund managers have been buying Ukraine’s dollar bonds in a bet on Donald Trump winning the US election and taking steps that would accelerate an end to the war with Russia.
Ukrainian notes have returned almost 6% this month, among the top performers in emerging markets worldwide, with prices nearing 50 cents on the dollar across the maturity curve. Warrants that have payments linked to Ukraine’s economic performance are trading at above 70 cents on the dollar, their highest levels since Russia’s full-scale invasion in 2022, when they plunged to less than 15 cents.
Funds have been buying the probability that a Trump presidency brings about a quicker ceasefire, according to Dmytro Bozhko at Kyiv-based Dragon Capital. “This idea is pretty widespread in the market,” he said. “Especially, contingency bonds due in 2035 and 2036 are in focus,” he said, referring to bonds issued after a debt-restructuring agreement in August.
Major obstacles remain to bringing Russia to a negotiating table with Ukraine, and the government in Kyiv is concerned that Russian President Vladimir Putin could use any truce to regroup before striking again. Russian troops are advancing in the grinding war and there have been no signs that Putin is interested in peace talks.
Conflict Resolution
Trump and Ukrainian President Volodymyr Zelenskiy met in New York last month to discuss plans to resolve the conflict. After their meeting, Trump said he had “learned a lot” but that their talk hadn’t changed his stance that negotiations with Putin could bring an end to the fighting. In an interview with Bloomberg last week, Trump declined to respond to claims he’d spoken with Putin since leaving office, but said it would be a “smart thing” if he had.
Trump has said that he would have the Ukraine conflict “settled” before even taking office, and declined to answer whether or not he wanted Ukraine to win the war. His vice presidential candidate, JD Vance, has advocated for ending financial support to Ukraine and has voted against aid packages in the Senate.
“The market is starting to price in the probability of peace talks being accelerated” either under a Trump presidency, or before it, said Thys Louw, a portfolio manager at Ninety One UK Ltd. “This has pushed Ukraine to get ducks in order so that they don’t get pushed into a bad deal.”
An agreement between bondholders and Ukraine’s government in late August to restructure $20 billion of defaulted debt is adding to bullish sentiment among investors. But some say they’re buying the debt despite — not because of — the possibility of a Trump return to the White House.
‘Misplaced Optimism’
“We last bought before the restructuring deal,” said Kieran Curtis, director of investment at Abrdn in London. “Nothing to do with Trump, and I think our gut feeling would still be that Ukraine sells off on a Trump victory.”
Trump has claimed he has a plan to end the war quickly, though a lack of specifics about how he would achieve that beyond talking with Putin — as well as scant details on what any Trump-bartered deal would look like for Ukraine — has fueled concerns in Kyiv. European allies also worry a second Trump presidency would put future American aid to Ukraine in jeopardy.
Kaan Nazli from Neuberger Berman is skeptical of the Trump trade when it comes to Ukraine.
“It appears there is some excitement over a scenario that a Trump/Vance victory would usher in fresh negotiations for a ceasefire between Russia and Ukraine,” he said. “However, we think this optimism is misplaced. The sides are far apart and the Russian demands on Ukraine are quite maximalist.”
Neuberger Berman is overweight Ukrainian bonds, meaning it owns more of them than benchmark weightings would suggest relative to other holdings, with its positive view predicated on “continued Western support and EU convergence,” Nazli said.
BofA Securities also recommends buying Ukrainian debt, saying valuations have an asymmetrically positive risk-to-reward ratio. At the end of last year, Amundi SA, Europe’s largest asset manager, said Ukraine’s bonds were one of its top picks for 2024, in part because the prospect of a Trump victory could force Ukraine to negotiate a truce with Russia.
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