Russia and Ukraine assets are seeing big price falls after US officials warned of an imminent invasion by Moscow of its neighbour.
Cash bonds and other financial securities from both countries are under pressure as fears mount that the crisis could turn into conflict in the coming days. Ukraine's bonds are down several points this morning, while the long end of Russia's curve is also selling off.
"Russian and Ukrainian assets [are] getting pummelled this morning," wrote Tim Ash, senior EM sovereign debt strategist at BlueBay Asset Management.
A trader said "most of the flow" is generally in the two sovereigns' curves, as opposed to corporates and financial institutions. He pointed out that while some hedge funds are covering short positions to take profits, ETF funds and institutional money managers are selling.
Another trader said, though, "that bids are scarce. Everyone is just managing risk, to be honest".
Ukraine's 7.75% September 2022 is bid at 90.50, according to Refinitiv, down from 95.84 at Friday's close.
The sovereign's GDP-linked warrants are faring even worse, bid at 64, according to Tradeweb, from 71.30 at Friday's close. Payouts on those bonds, which were issued as part of Ukraine's debt restructuring in 2015, are linked to economic growth.
Ukraine's five-year CDS, meanwhile, has widened by 100bp this morning to 956bp, according to Markit.
Russia's bonds are also feeling the pinch, especially at the long end, albeit they trade at very different yields to Ukraine. Russia's 5.25% June 2047s are bid at 101.10 to yield 5.17%, according to Tradeweb. The bond is 5.5 points below Friday's close.
At the other end of the sovereign's curve, its 4.875% September 2023s are down just under 1 point from Friday's close, bid at 103.29 for a yield of 2.73%. It is, though, about 60bp wider in spread terms. The sovereign's local currency bonds, OFZs, are 45bp–60bp wider.
Russia's five-year CDS is also nearly 50bp wider this morning, bid at 267bp, according to Markit, from 221bp at Friday's close. "[It's] insane, in my mind, that people were actually buying Russia risk in the last few weeks," wrote Ash. "Five-year CDS last week or so had traded back from 260bp to 180bp on nothing but false optimism."
The huge moves in both Ukraine's and Russia's bonds and CDS came after US authorities indicated that Russia is planning to invade Ukraine any time. Russia has denied it is planning an invasion.
One investor said the situation was having a knock-on effect across other markets. "The Russian/Ukraine situation is concerning and the geopolitical fallout of it is affecting all risk assets, not just EM or the CIS region itself," he said.
No new bond deals were launched in Europe on Monday, for example, as investors adopt a wait-and-see approach, although the crisis in the CIS is not the only reason behind their caution. Primary issuance has been stop-start for several weeks because of rising borrowing costs.
If Russia does invade, governments in Europe and the US have warned of further sanctions against Moscow. US and European officials are finalising an extensive package of sanctions if Russia invades Ukraine that targets major Russian banks, reports Reuters, but does not include banning Russia from the SWIFT financial system, according to US and European officials.
"With all the sanctions we have seen so far, Russia seems to have managed to live with them. What might be more impactful, and where I think I see new sanctions being announced, are those that directly/indirectly impact President Putin’s wealth, so hurting his own pocket," said the investor.
(additional reporting by Robert Hogg)
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