Some EM Bond ETFs Surviving Ukraine Conflict

ETF Trends

Political conflict in Ukraine has claimed nearly 80 lives with fighting between police and anti-government protesters punishing the country’s sovereign debt.

Ukraine bonds did rally Friday with short-term bonds due in June jumping to 96 cents on the dollar from just over 93 cents on Thursday. However, considerable damage has been done as Standard & Poor’s slashed its rating on Ukraine to CCC from CCC+ with a negative outlook.

“We now believe it is likely that Ukraine will default in the absence of significantly favourable changes in circumstances, which we do not anticipate,” Bloomberg reported citing a statement by S&P. The ratings agency added political tensions in Ukraine put “the government’s capability to meet debt service at increasing risk, and raises uncertainty regarding the continued provision of Russian financial support over the course of 2014.”

Ukraine’s currency, the hryvnia, is off 10% year-to-date, worsening the country’s current account deficit at a time when some investors are concerned with Ukraine’s dwindling foreign currency reserves.

The Ukraine crisis and the Russian central bank’s reluctance to defend the ruble to the satisfaction of international investors has also plagued Russian assets. Although it is up more than 4% this month, the Market Vectors Russia ETF (RSX) lost 3.1% from Feb. 14 through Feb. 20.

Some emerging markets bond ETFs featuring  decent-sized combined allocations to Russian and Ukraine have held up as well as could be expected. Not including Friday’s gains, the iShares Emerging Markets High Yield Bond ETF (EMHY) is up nearly 2% this month.

That is no small feat considering EMHY’s combined 8.3% weight to Russian and Ukraine debt. EMHY also features a 3.8% weight to Hungarian bonds, notable because Hungarian assets have also been pressured by crisis in Ukraine. The $180 million EMHY has a 30-day SEC yield of 7.1% and an effective duration of 5.47 years. [Not All Bad With EM Bond ETFs]

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