What are War Bonds and Why Did Ukraine Sell Them?

(Bloomberg) -- In wars and other crises, governments sometimes appeal to the patriotism of their citizens to cover financing gaps. So through history they've sold so-called war bonds to raise funds rapidly for military operations or other emergencies. Ukraine quickly turned to the idea after it was invaded by Russia, selling a first batch of war bonds to raise money for its armed forces and civilians. 

1. What are war bonds? 

They're debt instruments sold to finance military operations and production in wartime, sometimes alongside a propaganda campaign that promotes their direct purchase by individuals as a civic duty. They can also be sold to institutional investors, as was the case with Ukraine's sale, which raised 8.1 billion hryvnia ($277 million). While they vary in structure, war bonds tend to have lower yields and longer maturities than other government debt, potentially stretching repayment over decades. Ukraine's war bonds have similar characteristics to the debt it sells regularly in peacetime and will mature in one year. 

2. Why is Ukraine selling war bonds?

The move is part of a wider crowdfunding effort to capitalize on domestic and international support for Ukraine as it tries to repel Russian forces. The country's precarious finances have long relied on support from the International Monetary Fund and suffered another blow from the coronavirus pandemic. Its credit ratings were cut further into non-investment grade, or junk, territory after Russia invaded, meaning many big institutional investors can't even buy its debt. The first war bonds sold on March 1 yielded 11% and had a par value of 1,000 hryvnia, or about $33. That compares to an implied yield of 37.8% on regular Ukraine one-year bonds traded in the secondary market. The government planned to auction more war bonds on March 8 to raise money for military gear as well as humanitarian aid such as clothing and blankets. Yuri Butsa, Ukraine's debt chief, told Bloomberg Television that the government may also issue foreign-currency bonds.  

3. How have war bonds been used through history? 

The U.K. most famously sold National War Bonds to help fund its participation in World War I. They paid a yield of 5% and the sale was supported by a huge advertising campaign intended to inspire patriotic fervor. When they were redeemed almost a century later, they were still owned by 120,000 investors. The U.S. sold “liberty bonds” during World War I and “defense bonds” during World War II. The latter were recast as war bonds after Japan's bombing of Pearl Harbor, which provoked the U.S. to enter the war, and were bought by more than 84 million Americans. 

4. Are there modern equivalents? 

Governments have used patriotic appeals to try to sell a wide range of novel debt instruments in difficult times. Italy sold bonds backed by revenue from the country's national lottery in 2001 when it was the European Union's most indebted nation. Greece attempted in 2012 to sell “diaspora bonds” to draw in funds from citizens living abroad during the depths of that country's debt crisis. In 2020, U.S. economic adviser Larry Kudlow proposed selling debt with a structure similar to war bonds to help support the economy through the coronavirus pandemic. In the end, the stimulus package was funded using regular Treasury bills. The EU mulled a sale of what became known as “coronabonds” during the pandemic, a controversial risk-sharing instrument. While that idea didn't fly, the bloc's 27 members have embarked on their biggest-ever splurge in joint borrowing, known as the NextGenerationEU bond program. 

5. Are war bonds controversial?

Yes. They can be volatile by nature since they're often sold when a country's economic and political fortunes -- or even its very existence -- are most unpredictable. Increasingly, investors need to be mindful of environmental, social and governance guidelines when dealing with such situations. Ukraine's war bonds offer a way to lend money directly to the country's embattled government and potentially reap an outsized return at the same time. Some retail investors scouring investment forums such as Reddit were trying to get in on the action. 

The Reference Shelf

• Ukrainian war bonds paying 11% were a risky bet retail investors wanted to buy.
• A Bloomberg Opinion column by Mark Gonfloff on the wisdom of buying the Ukrainian bonds.
• Bloomberg Opinion's Brian Chappatta debated the purpose of war bonds in 2020.
• The Corporate Finance Institute explains the history of war bonds.
• More from the U.S. Treasury on the U.S. savings bonds program.

©2022 Bloomberg L.P.