Yield-hungry funds lend $2bln to Ukraine

July 18, 2012

Investors just cannot get enough of emerging market bonds. Ukraine, possibly one of the weakest of the big economies in the developing world, this week returned to global capital markets for the first time in a year , selling $2 billion in 5-year dollar bonds.  Investors placed orders for seven times that amount, lured doubtless by the 9.25 percent yield on offer.

Ukraine’s problems are well known, with fears even that the country could default on debt this year.  The $2 billion will therefore come as a relief. But the dangers are not over yet, which might make its success on bond markets look all the more surprising.

Perhaps not. Emerging dollar debt is this year’s hot-ticket item, generating returns of over 10 percent so far in 2012. Yields in the so-called safe markets such as Germany and United States are negligible; short-term yields are even negative.  So a 9.25 percent yield may look too good to resist.

Moreover Ukraine paid a substantial premium to compensate investors for the risk. Last June it sold a $1.25 billion 5-year bond, paying just 6.25 percent or 300 basis points less. Michael Ganske, head of emerging markets research at Commerzbank says:

At the moment investors are pouring money into emerging fixed income, they just want to get a better yield for their portfolios. People understand Ukraine is not a fantastic credit but it is a matter of value for money — just look at the yield. I think this deal was positive for both sides: Ukraine were able to issue and get money in the bank and investors received an attractive yield.

Ukraine wasn’t the only weak credit to benefit from the appetite for emerging debt. Sri Lanka, rated like Ukraine deep in junk territory, raised $1 billion in 10-year cash, paying 5.875 percent. Demand for the bond exceeded $10 billion.

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