GRAPHIC-Ukraine bond, CDS curve inversion ends as default risk falls

LONDON Thu Dec 19, 2013 1:16pm GMT

LONDON Dec 19 (Reuters) - Markets are pricing out risks of a near-term default in Ukraine following a $15 billion aid pledge from Russia, with short-dated bond yields and the cost of buying one-year debt insurance slipping off recent highs.

Ukraine's bond and credit default swaps curve have both been inverted since September, a classic sign of credit stress. Inversion means bonds maturing in the next year trade at higher yields than those due later, reversing the normal picture.

The change reflected fears that Ukraine was less likely to repay debt in the coming year than in five years' time, reflecting rising political tensions and the central bank's dwindling hard currency reserves.

But with Russia agreeing to provide assistance and also to slash Ukraine's gas bills, that yield curve inversion appears to have ended, the following graphic shows:

link.reuters.com/vuh43v

Ukraine's $1.5 billion bond maturing 2020 is yielding 9 percent, more than 150 basis points lower than at the end of last week, Thomson Reuters data shows. The yield on a $1 billion bond maturing next June has more than halved in the same period to 8 percent.

The credit default swap curve has also returned to its normal shape, meaning the cost of buying five-year credit protection has once again risen above the cost of one-year CDS, according to data from Markit that is reflected in the following graphic:

link.reuters.com/wug43v

JPMorgan analysts advised buying short-dated Ukrainian bonds, noting the reduced financing risks.

"The Russian financial assistance package should cover Ukrainian dollar bond payments until year-end 2014 and provide Ukraine with a 2015 cushion. This is a strong financing positive given that market stress was focused on near-term financing issue," JPMorgan said in a note. (Graphic by Vincent Flasseur; Reporting by Sujata Rao; Editing by Catherine Evans)