Fixed Income

January 15, 2018

Ukraine’s sovereign Eurobonds enjoyed impressive gains last week, moving in line with a surprising global trend that has seen emerging-market sovereigns rally while US Treasuries have sold off amid rising expectations for US inflation. The situation has brought EM yield premiums over UST to their the lowest levels since 2007. While it is fair to expect that such a market is certain to cool down, there is no sign currently of a selloff in EM bonds amid the strong demand for yield. In our view, however, valuations on Ukrainian sovereigns have reached resistance levels that are reasonable when considering the credit and liquidity risks. The benchmark 10-year Ukrainian sovereigns jumped by 2.4% to 106.1/106.9 (6.9%/6.8%) and medium-term 2023 bonds gained 1.5% to 108.0/108.8 (6.0%/5.9%). The VRI derivatives (linked to Ukraine’s future GDP growth with expiration in 2040) advanced by 4.7% to close at 58.5/59.3 cents on the dollar.