What Are War Bonds? The Ukrainian War Bond

With Ukraine pushed out of the capital markets, they are forced to sell bonds in order to raise money. Bonds are essentially loans that governments and companies issue to investors. These loans pay out an interest rate over the maturity period designated by the bond.

In the case of war bonds, they are considered higher risk assets. As such, investors demand more and more interest because of the dire situation within the country, and the likelihood that the government will be able to service those debts diminishes over time. Because of this risk, these war bonds are not sold to professional money managers who try to maximize returns in the short term. Instead they are sold to your typical individuals who may not weigh out risks and seek to maximize returns. Retail investors who are comfortable with additional risk may seek out higher returns through different assets. 

Ukrainian wars bonds pay 11% currently with a 1 year tenure (also known as maturity) allowing the country to raise money for military spending. They have raised $277 million as of early March from big institutional investors. Although this is still considered a relatively small amount because international investors don’t want to invest in currencies that are not widely traded and therefore have limited liquidity.

There is also a 2 month war bond that is paying 10%. Because Ukraine’s financial infrastructure is frozen, they are only able to raise capital through war bonds. Throughout history, you have seen this during wartime periods as certain countries close their stock markets. However, the United States has kept the economic machine churning evening both World Wars. Currently you can sell international currencies and buy the Ukrainian currency Hryvnia as a means to try and access government bonds, but not the other way around. Even then, retail investors generally cannot purchase war bonds easily. 

The US financed WWI when they issued the Liberty Bonds, and the UK also issued bonds during this time but it took them 100 years to repay part of its debt since then. A sign that the time horizon is often long and deferred to the next generations. 

Normally investors think of bonds as a safer asset class with low volatility and a much more reliable rate of return. But war bonds are a different story.

Ukraine is in war so the currency still faces significant risk, and there is no guarantee that the Ukrainian government will pay back the amount owed, hence the increase in interest premium that is offered in the market. 

Most bonds are difficult for your typical investor to buy because they are often sold directly by banks to larger professional investors, and require a large investment up front. Some of the bonds were auctioned through Citigroup as well as a couple international banks but for smaller investors there will not be many options to access these. 

Because of the difficulty to access capital internationally, the next best alternative in the 21^st century is the modern digital war bond: Cryptocurrency and NFT’s.

Ukraine has a fitch debt rating of CCC following the Russian aggression, placing its loans deep in the junk bond territory. Even the BB rated mortgage bonds from the last housing crisis were considered junk. CCC would fall into the speculative realm of investments. When considering making an investment, consider the spectrum of data before making a final decision.