Fixed Income Comment: EM debt strengthened further yesterday as UST extended its recent rally and subsequently Russia’s EMBI+ index posted gains of around 0.6% over the day

EM debt strengthened further yesterday as UST extended its recent rally and
subsequently Russia’s EMBI+ index posted gains of around 0.6% over the day,
albeit with a marginal spread widening. A move that outperformed the overall
EM benchmark component and contributed to a MTD gain of 1.23%. Volumes
were once again modest and with activity confined to the longer duration credits
the Russian sovereign curve flattened accordingly. The benchmark RU30
opened at 1101/2 and traded higher throughout the day to close in New York in a
111-1113/8 range. Given that this move largely mirrored developments in the
UST curve the respective RU30 spread over 10-year UST notes was relatively
flat over the day at 169 bps. Across the curve, few trades were noted in the
RU28 issue and the spread over RU30 widened marginally to the lower end of its
recent 50-52 bps trading range. Although the MinFin and ARIES curve were
marked higher the longer dated ARIES ’14 issue outperformed and led to a
tightening in its spread over the benchmark bond from -2 bps to -6 bps. Although
Russian corporate and banking sector eurobonds were relatively inactive we
expect today’s decision by Moody’s to upgrade Gazprom from Baa3 to Baa2 to
support the bid for longer duration credits. Russia has opened this morning with
the benchmark RU30 trading in a 1111/4-1113/8 range (168 bps mid-market over
UST) and over the near-term we expect technical factors to remain supportive.
That said, we still view 10-year UST yields at sub-4% levels as unsustainable
and contradictory to current macro dynamics, and consequently EM debt remains
exposed to any sell-off in UST.