(Bloomberg) -- One of the most popular emerging-market trades around Donald Trump’s return to the White House is stumbling.

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Ukraine’s dollar bonds have handed investors losses of more than 10% so far in 2025, the worst showing among emerging and frontier markets, as the prospect of Trump making good on his promises and brokering a peace deal dim.

That’s a stark turnaround from their gains around the turn of the year when ceasefire bets made Ukrainian debt a top performer — almost doubling the price of some bonds since an August restructuring — and lifted markets across Eastern Europe.

While investors aren’t giving up on a deal, they’re tempering their optimism.

London-based hedge fund Frontier Road prefers exposure via corporate bonds, which it says are less vulnerable to geopolitical shifts. Bank of America Corp. still has an overweight recommendation on Ukraine’s foreign debt, but warns of “downside risks” as the fighting drags into its fourth year. Morgan Stanley sees hostilities persisting through 2025.

“The market is back around levels seen before Trump’s election,” said Viktor Szabo, an investment director at Aberdeen Investments. “The promise to deliver peace a day after inauguration was met by the reality that Putin doesn’t want peace.”

Trump floated the prospect of face-to-face talks between him, Russian President Vladimir Putin and Ukraine’s Volodymyr Zelenskiy earlier in the month in Istanbul. Rather than attending in person, Putin sent a low-level delegation instead, with the result that only Zelenskiy went to Turkey.

For Eastern Europe more broadly, meanwhile, the reasons behind the U-turn in the Ukrainian bond market are why bourses from Warsaw to Budapest have posted some of the biggest increases worldwide.

Curbing Support

Initially, assets in the EU’s east were buoyed by hopes of a peace deal bringing stability and more investment to the region.

Subsequently, the possibility of Trump curbing military support for Europe and walking away from the peace process spurred Germany and other governments to action. The hundreds of billions of euros they’ve pledged in defense spending lifted markets across Eastern Europe on wagers their economies will benefit.

The main stock indexes in Warsaw, Prague and Budapest have each handed investors returns in excess of 30% this year in dollar terms. And the Hungarian forint, the Czech koruna and the Polish zloty are at the top of emerging-market advances against the dollar so far in 2025, only eclipsed by the rebound in the Russian ruble.

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At the same time, Ukraine’s extreme market U-turn is a reminder that geopolitical risks are creating pockets of turmoil. Elections in neighboring Romania and Poland are keeping investors on their toes, and there’s the threat of wider fallout from the lack of a peace deal.

Hungarian Prime Minister Viktor Orban — one of the most prominent Trump backers in Europe — said on Friday that delays in the Ukraine peace efforts would cause lingering economic headwinds into 2026.

The Kremlin continued to douse hopes for progress. On Friday Russian officials rejected Trump’s suggestion of hosting peace talks at the Vatican as unrealistic.

Ukraine’s dollar bonds were repeatedly among the worst EM performers on several days in the past week. Zero-coupon bonds due in 2035, whose future payouts are linked to Ukraine’s economic performance, are trading around 50 cents on the dollar, down from around 70 cents in February, indicating deeper distress.

“The main impact of the delays in peace talks has obviously been seen in Ukraine sovereign bonds,” said Martin Bercetche, a portfolio manager at Frontier Road. “An investment in those bonds is predicated on some sort of ceasefire or resolution to the fighting.”

Key events to watch this week:

Runoff in Poland’s presidential elections on Sunday June 1

Talks on the formation of a new Romanian government

Central bank decision in Hungary and Uruguay on Tuesday, South Korea on Thursday

--With assistance from Srinivasan Sivabalan and Zijia Song.

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