Impact of conflict on sovereign bonds

Our thoughts are with the Ukrainian people at this time.

The effect of the war is most keenly felt on the ground and the direct impact on people’s lives.

However, there are broader political and economic effects that flow from actions and reactions and those in turn create waves in financial markets.

So how have international sovereign bonds reacted?

Six months ago, Ukraine’s US$ 2022s were yielding 3.05% at a price of 104.40 whilst their US$ 2028s were at 6.12% at a price of 120.98. These are now trading at 31.68 and 19.50 respectively.

Russia’s US$ 2022s were yielding 0.59% at a price of 102.18 whilst their US$ 2028s were at 2.08% at a price of 167.36. Both bonds are now trading at 20.

Unsurprisingly, focus is on the short-end as the market anticipates a huge amount of nearer-term uncertainty.

As of now both country’s bonds trade at more or less similar cash prices, but with markedly different drivers, so a question for analysts is to predict the constraints and consequences going forward.

It seems inevitable that prices (and hence yields) will significantly diverge but how far and how fast?