Montreal, Canada

One of the worst managed economies since the onset of the credit crisis more than three years ago is Ukraine. More than any other Eastern European economy – Hungary places a distant second – Ukraine was the closest to financial obliteration in late 2008 as credit markets came undone.

The breadbasket of the former Soviet Union, Ukraine is a formidable agricultural producer – especially abundant in grain production. In late 2008, the government scrambled to avoid defaulting, courtesy of the International Monetary Fund, or IMF.

Two years later, the economy has turned the corner after witnessing a 1930s-type GDP crash of 15% last year. But a recent global bond offering turned out to be highly successful with the government unloading a $2 billion dollar note in two separate offerings last week.

The first tranche was a five-year coupon paying 6.9% and the second note, a ten-year bond yielding 7.8%. This compares to benchmark U.S. Treasury bonds yielding 1.3% and 2.5%, respectively.

What’s amazing, however, is the rate of interest Ukraine paid to sell these notes. The Greeks, whom are technically broke and had to be rescued by the European Union (EU) and the IMF in May to avoid a default, pay a higher rate of interest on current government debt.

Ten-year sovereign Ukrainian debt yields 7.8% compared to 11.5% for Greek sovereigns. Greek debt actually yields 370 basis points more than Ukrainian debt despite the wall of money currently being thrown at the Greek treasury.

Ukraine, by the way, saw demand for its recent two auctions oversubscribed by three times or $6.2 billion dollars. What’s wrong with this picture?

Investors have completely fallen off the deep end this year, lunging after yield wherever they can get it. The danger with this strategy is that it’s occurring as interest rates nosedive since May and credit quality deteriorates in the hunt for greater yield-flow. Ukraine and Greece are ongoing examples. The same is true for Spain, Portugal and Ireland. Junk bonds fall into this category, too.

For now, the party in bonds remains in a secular bull market despite ongoing rumblings of a “bubble.” But when it ends, a lot of people are going to get badly burned. It’s inevitable because central banks – namely the United States – are gunning for inflation. They’ll get their wish.