* Premium on Ukraine over US Treasuries surges past 1,000
* Market pricing in risk of Russian military action
* Bond spreads comparable to when Russia annexed Crimea in
LONDON, Jan 17 (Reuters) - Ukrainian sovereign dollar bonds
tumbled into distress territory and Russian bonds suffered sharp
falls on Monday as fears of another Russian military foray into
Ukraine showed no sign of easing.
The premium investors demand to hold Ukraine bonds over
safe-haven U.S. Treasuries as measured by the JPMorgan EMBI
Global Diversified index surged past 1,000 basis
points for the first time since the COVID-19 pandemic emerged in
Less than a dozen countries in the 70-plus strong index have
quadruple-digit spreads, including Venezuela, Zambia, Lebanon,
Sri Lanka and Ghana which are all either in default or deep debt
"The market has to price in some kind of probability of
Russia invading," said Viktor Szabo at asset manager abrdn,
noting as well how the concerns had suddenly hit home for
investors in recent days.
The United States said last week it feared Russia was
preparing a pretext to invade Ukraine if diplomacy fails to meet
its objectives, after a massive cyberattack splashed Ukrainian
government websites with a warning to "be afraid and expect the
Talks between Moscow and Western states on Russia's
deployment of tens of thousands of troops along Ukraine's border
had also ended with no breakthrough.
Russia denies it plans to attack Ukraine but says it could
take unspecified military action unless its demands - including
a promise by the NATO alliance never to admit Ukraine - are met.
Ukraine's bond spreads, seen as a proxy for such risks, have
already more than doubled since November and are now at levels
last seen at the height of the March 2020 COVID-19 market rout.
They are also broadly comparable to levels hit when Russia
invaded and then annexed Crimea in March 2014, although spreads
then blew above 4,000 bps in early 2015 when Kyiv was tipped
into default in the resulting turmoil.
Monday's sell-off saw Ukraine's bonds continue to fall on
international debt markets. Some were down more than 3 cents on
the day at nearly 80 cents in the dollar
having been at 100 cents just over a month ago.
Many issues also saw bid-ask spreads widen to well over one
cent, indicating that traders were having difficulty offloading
"Ukraine has probably lost market access, and this could
complicate financing plans this year, if sustained," said Stuart
Culverhouse at Tellimer.
Last month the head of Ukraine's debt management department
told Reuters the country was hoping to wait out the current
tensions. It will need money at some point though with a $1
billion refinancing deadline in September.
Russian sovereign bonds also felt the pain. Yields on
Russia's 10-year benchmark OFZ government bonds hit their
highest since April 2016 at 9.5%. Refinitiv data
also showed the country's 2043-maturing dollar-denominated bond
tumbling more than 5 cents at one point and
again many of the bonds hit their lowest since 2020's pandemic
Russian spreads over U.S. Treasuries widened as far as 238
bps on the day which left them 71 bps up this year. The moves
were then pruned slightly after German newspaper Handelsblatt
reported that Western governments had taken the option of
cutting Russian banks off from the crucial Swift global payment
system off the table.
The rouble also edged higher on that speculation, but 5-year
credit default swaps (CDS) for both countries rose again, too.
Ukraine's CDS which investors use to hedge their
risk were up 76 basis points from Friday close at 918 bps, data
from IHS Markit showed. Russia's jumped by 34
bps to 215 bps.
Veteran Ukraine and Russia watcher at BlueBay Asset
Management Tim Ash called it a "strange day" when markets had
suddenly woken up to the risks of the situation.
(Reporting by Karin Strohecker and Marc Jones; Editing by Toby
Chopra and Hugh Lawson)