As expectations for an end to the Ukraine war have weakened, the price of Ukraine Government Bonds has plummeted. Following the election of U.S. President Donald Trump, there was a temporary surge in hopes for peace, but with no substantial progress, market expectations have cooled.
According to Bloomberg News on the 25th (local time), Ukraine Government Bonds have recorded over a 10% loss this year, making them the worst performers among emerging and frontier markets. After a rebound following the debt reorganization in August, Ukraine Government Bonds nearly doubled immediately after Trump was elected due to optimism about a peace agreement, but they have since given back most of those gains and returned to a weak trend.
Last week, Ukraine's zero-coupon bonds linked to the country's economic growth, maturing in 2035, fell to the 50 cent range. This is a drop of about 28% compared to around 70 cents in February, marking the worst performance among emerging market bonds. Martin Burchiche, a portfolio manager at Frontier Road, noted, "Although expectations for a ceasefire or peace have led to investment in Government Bonds, currently, market optimism about a peace agreement has faded."
Previously, Russia and Ukraine held peace negotiations in Istanbul, Turkey, on the 16th, but the discussions ended without significant achievements as the Russian side sent a delegation composed of lower-level officials. As a result, the expectations reflected in the market seem to have diminished, leading Ukraine Government Bonds to revert to levels prior to Trump's election.
In fact, the market continues to sell Ukraine Government Bonds, believing that peace negotiations between the two countries will be difficult to realize in the near future. The London-based hedge fund Frontier Road stated, "We are focusing on corporate bonds rather than Government Bonds with high geopolitical risks," while Bank of America maintained its opinion on increasing their holdings of Ukraine Government Bonds but warned of downward risks associated with the prolongation of the war. Morgan Stanley has also forecasted that fighting will continue throughout the year.
In contrast, European countries feeling security crises have significantly increased their defense expenditures, leading to a thriving Eastern European stock market. According to Bloomberg, the stock markets in Poland, the Czech Republic, and Hungary have risen by over 30% this year, and the three countries' currencies—Polish zloty, Czech koruna, and Hungarian forint—are also showing the strongest performance among emerging market currencies, excluding the Russian ruble.
However, it is still necessary to monitor the situation. Along with geopolitical risks, the election schedules of key Eastern European countries such as Romania and Poland, as well as the potential for the war to drag on, are contributing to significant market volatility.
Leaders around the world are also on high alert. Hungarian Prime Minister Viktor Orbán has urged for a swift peace agreement, stating, "If the end of the Ukraine war is delayed, the European economy could face headwinds until 2026."