Fixed Income Comment: Russian eurobonds eased further yesterday as UST extended the recent selling rally and subsequently underperformed the EM debt curve

Russian eurobonds eased further yesterday as UST extended the recent selling
rally and subsequently underperformed the EM debt curve with the Russian
EMBI+ index losing 0.16% over the day compared to the marginal decline in the
overall EMBI+ index. Nevertheless, the moves across EM failed to keep pace
with the retracement in UST and spreads tightened further with the Russian
EMBI+ spread component contracting 2 bps to 162 bps, and at current levels,
remains 2 bps wide of its record level. Despite such moves, overall volumes
were once again modest, as appetite among local market participants remains
lacklustre. Activity was largely confined to the longer duration credits and the
sovereign curve steepened accordingly. The benchmark RU30 opened at
1101/16 and traded higher 1107/16 before tracking UST lower in late trading to
close at 1097/8. Still, with 10-year UST yields breaking through the 4.10%
threshold for the first time since mid-May the resultant impact of the move led to
RU30 spread levels compressing from 168 bps to 165 bps, its tightest point to
date. Across the curve, few trades actually occurred and the RU28 spread over
RU30 was confined to the wider end of its recent 50-52 bps trading range.
Despite the longer dated ARIES issue being marked lower in line with the
sovereign curve, the ’14 continues to suffer from increasing illiquidity and the
respective spread over RU30 widened further to -2 bps. With this move largely
fulfilling our view for a correction in ARIES ’14 spread levels from -35 bps
towards parity against RU30, at current levels, we consider the long end of the
ARIES curve to offer value.
The benchmark RU30 has opened this morning in a 1097/8-110.0 range and
given that the US data flow gathers momentum today with a host of significant
releases we expect a UST driven market again today. The key highlights include
CPI, business inventories, net foreign security purchases, IP, capacity utilisation
and the Fed’s Beige Book. While the CPI data will clearly assume significance
we expect that given the shift in the technical picture any evidence of robust
growth conditions is likely to stimulate further bouts of short positioning. That
said, although EM will continue to remain vulnerable to UST selling pressures we
retain our near-term target of 160 bps for RU30 spread levels over UST.