MNB Fixed Income Comment: Russia’s external debt outperformed its EM peers with the Russian EMBI+ index posting 0.31% gains compared to the 0.12% rise in the overall EMBI+ index

Russian eurobond prices firmed yesterday, tracking UST higher in the aftermath
of considerably weaker than expected US durable goods orders and renewed
concerns regarding the strength of US economic growth. Indeed, Russia’s
external debt outperformed its EM peers with the Russian EMBI+ index posting
0.31% gains compared to the 0.12% rise in the overall EMBI+ index and led to
further compression in Russia’s spread over Mexico’s sovereign credit curve.
That is, the Russian spread over Mexico has contracted to its tightest level yet at
4 bps and thus confirms our long held view that Russia will trade through such
levels. Volumes were once again modest across the EM asset class and activity
restricted to the benchmark issues. In Russia, the benchmark RU30 traded from
an opening level of 10513/16 to a low of 1059/16 before moving higher to reach
1061/4 in New York. Although a mildly disappointing 2-year UST auction
(bid/cover ratio at 1.77% compared to 2.03% in the previous event) led to some
profit taking and with UST retracing from the day’s high, RU30 also closed
slightly off at around 1063/16. Still, with 10-year UST yield revisiting the levels
witnessed a week ago the overall impact of this move on the RU30 spread was
negligible and a modest widening occurred from an opening level of 195 bps to
close at around 198 bps. Elsewhere in Russia, few trades actually occurred and
the MinFin and ARIES curves were marked higher accordingly. Similarly, across
the corporate and banking sector eurobonds the longer duration more liquid
Gazprom credits improved in line with the sovereign curve.
Russia has opened this morning with the benchmark bond trading at similar
levels to yesterday’s close, at 1061/8, with the spread over 10-year UST note
marginally tighter at 197 bps. In view of today’s data releases, including GDP,
GDP price deflator, personal consumption and jobless claims, we expect
direction across EM to be UST driven today. Despite the somewhat mixed
signals stemming from the recent batch of US data, we still consider this
insufficient to deter the Fed from raising interest rates towards its desired neutral
level and expect UST yields to push higher over the coming weeks. That said,
we expect Russian and Kazakhstan to remain the more resilient EM credits and
view 190 bps as the short-term target for RU30 spread levels.