Ukrainian bond market stumbles amid ongoing conflict

[EUROPE] A once-hot emerging-market trade tied to Donald Trump’s potential return to the White House is faltering. Ukrainian dollar bonds have dropped more than 10% so far in 2025, making them the worst-performing assets among emerging and frontier markets. The losses reflect fading hopes that Trump would follow through on promises to broker a peace deal in Ukraine.

It’s a sharp reversal from earlier in the year, when optimism around a potential ceasefire turned Ukrainian debt into a star performer. Some bonds nearly doubled in price after a major restructuring in August, fueling a rally across Eastern European markets.

While hopes for a peace agreement haven’t vanished entirely, investor sentiment has cooled significantly. The recalibration is driven by the geopolitical complexities on the ground. Despite initial confidence in Trump’s ability to leverage U.S. influence to end the conflict, the war has proven more resistant to diplomacy than many anticipated. The absence of progress in negotiations has prompted investors to reassess risk, dialing back expectations for a rapid or durable truce.

Further compounding the uncertainty is Ukraine’s domestic political landscape. Kyiv faces internal hurdles, including economic strain and political infighting, that are clouding the outlook for any meaningful breakthrough. These challenges have deepened investor skepticism about the sustainability of any peace deal, eroding confidence in the country’s sovereign debt.

London-based hedge fund Frontier Road is avoiding sovereign bonds altogether, preferring corporate debt that it views as more insulated from geopolitical upheaval. That approach is gaining traction among investors seeking exposure to Ukraine while sidestepping its biggest risks. Bonds issued by firms with solid fundamentals and diversified revenues are seen as a safer bet amid the turbulence.

Still, some major institutions remain cautiously optimistic. Bank of America maintains an overweight stance on Ukraine’s foreign bonds, though it acknowledges “downside risks” as the war grinds through its fourth year. Morgan Stanley, meanwhile, expects hostilities to stretch into 2025. These differing views underscore how difficult it is to forecast the war’s course — and how divided the market remains on Ukraine’s prospects.

The international diplomatic effort has done little to lift sentiment. Mediation attempts by the United Nations and other global players have had minimal impact, reinforcing the market’s pessimism. The absence of a coherent, effective international push for peace has only added to investor unease.

“The market has fallen back to levels seen before Trump’s election,” said Viktor Szabo, investment director at Aberdeen Investments. “The idea of delivering peace the day after inauguration collided with the reality that Putin isn’t seeking peace.”

Earlier this month, Trump floated the idea of holding direct talks with Russian President Vladimir Putin and Ukraine’s Volodymyr Zelenskiy in Istanbul. But Putin opted to send a low-level delegation instead, leaving Zelenskiy to attend alone.

Across Eastern Europe, however, markets have moved in the opposite direction. Equity indices from Warsaw to Budapest have notched some of the world’s strongest gains — a reflection of the very same dynamics that have weighed on Ukraine’s bond market.