Ukraine bonds rally for second day on ceasefire optimism

Updates with quote, figures on Ukraine's economy and bond triggers

By Libby George and Marc Jones

LONDON, Feb 13 (Reuters) - Ukraine's government debt rallied for the second consecutive day on Thursday on hopes that Donald Trump-orchestrated peace talks with Russia could end nearly three years of war that has displaced millions and hammered the economy.

Ukraine's bonds - led by those that pay out more if the economy grows faster than expected in the coming years - gained as much as 2 cents before retracing as U.S. trading gathered momentum.

"The bond market rally shows the market is increasingly pricing a ceasefire in, casting aside uncertainties over Trump's proposals," said Viktor Szabo, a portfolio manager with investment firm abrdn.

The 2036 maturity has gained more than 20 cents since the day before the November U.S. election won by Trump, and was bidding 1.75 cents higher on the day at 67.99 cents on the dollar by 1504 GMT.

Trump held what he called "great talks" with Russian President Vladimir Putin and Ukraine's Volodymyr Zelenskiy on Wednesday. The Kremlin said it was impressed by Trump's stance, and Trump and Putin are expected to meet face-to-face in Saudi Arabia.

Ukraine's bonds have rallied strongly since Trump's re-election and returned over 60% last year.

Russia's rouble and stocks also surged on Thursday, with the currency at its highest since September last year.

Goldman Sachs said this week that Ukraine's bond prices now imply at least 50% market odds of a peace deal.

The bank based that calculation on the price gap between one bond - a 2035 maturity that gives a higher payout if Ukraine's economy significantly outperforms the International Monetary Fund's forecasts through to 2028 - and other bonds that don't have the same "step-up" feature.

Goldman said the full payout from GDP outperformance was "only plausible in the event of a near-term and lasting resolution to the war".

Ukraine's central bank pegged GDP growth at 3.4% last year, leaving the size of the economy roughly $10 billion below the 2021 level of $199.8 billion.

The market optimism belies concerns over the shape and durability of a Ukraine deal, and European leaders have questioned Trump's approach.

Barclays earlier this week warned that the GDP-linked bonds - the zero-coupon 2035 and the 2036 maturities - had priced in "too much medium term optimism," but said that ceasefire headlines were likely to push them even higher as an initial reaction.

In order to trigger the higher payout, Ukraine's nominal GDP in fiscal 2028 would have to be at least 3% above the IMF's baseline projections from June last year, and real 2028 GDP would have to be at least equal to those estimates.

Goldman estimated hitting the full payout would require annual average real GDP growth of around 4.7% through 2028.

While most investors say the bonds could keep rising for now, the shape of the deal, and what comes next, is key further forward.

"Further integration with and potential EU accession is crucial (for Ukraine)," said Kaan Nazli, a portfolio manager with Neuberger Berman. "As an investor I would be watching what a deal means for those objectives."