Ukraine's international bonds rise on negotiation bets

By Karin Strohecker

LONDON, March 4 (Reuters) - Ukraine's international bonds staged a sharp turnaround on Tuesday, with most firmly up in price after an initial selloff as the United States paused military aid to the European nation on its war against Russia.

The 2034 bond enjoyed the biggest gains, rising around 1.4 cents to be bid at 42.9 cents in the dollar, Tradeweb data showed. The 2035 bond - where future payments are linked to economic performance - was nearly unchanged in price at 61.29 cents, and following a more than 2 cents drop in early trading.

Markets were taking some comfort from the prospect that Trump's action would force Ukraine's hand, analysts said.

"There is a path forward," said Erik Meyersson, chief emerging markets strategist at SEB.

"Trump playing hard ball means Zelenskiy might have to go along with that. It is not good news for Ukraine, but it might be good news for Ukraine bonds."

However, the latest gains have yet to fully offset Monday's sharp drop, when bonds tumbled more than 4 cents in the wake of an explosive meeting between presidents Trump of the U.S. and Zelenskiy of Ukraine that descended into a shouting match. The Ukrainian president then cut short his visit to Washington without signing a much-vaunted minerals deal.

Efforts by Europe to close ranks and shore up Ukraine would not be enough to replace U.S. support, at least in the near-term, analysts said.

The European Commission proposed on Tuesday to borrow up to 150 billion euros ($157.76 billion) to lend to EU governments under a rearmament plan driven by Russia's war in Ukraine and fears that Europe can no longer be sure of U.S. protection.

Goldman Sachs, which calculates market-implied probability of a peace deal by looking at the price moves of Ukraine bonds linked to GDP growth, said hope for a peace deal had faded since Friday's clash between Trump and Zelenskiy.

"The market-implied probability of a strong rise in Ukrainian GDP growth through 2028 has declined by 10 percentage points from 51% on Friday to 41% at present," said Goldman Sachs analyst Andrew Matheny, with a peace deal being one of the necessary ingredients for higher economic growth in the country.

"While the decline is notable, we nevertheless emphasise that a roughly two-in-five chance of a peace deal remains above any level prior to the U.S. presidential election in November."

Ukraine's GDP warrants - which pay out more if the economy grows strongly - failed to claw back any losses and extended Monday's declines, down 0.24 cents to trade at 80.36 cents. XS1303929894=TE