Gradual Growth (Russia Fixed Income Weekly)

Russian external debt posted fresh gains on the back of the stable global conditions. Domestic debt was also higher, on strong Eurobonds and improving liquidity.
Russian Eurobonds ended last week higher, as the relatively stable global environment enabled their spreads to tighten further. The spreads of sovereign issues reached the levels seen in late July, at the very beginning of the sub-prime credit crunch. The benchmark Russia 2030 issue added 0.48%, with its spread narrowing by 7 bp to 115.
Most corporate Eurobonds also gained over the week. The DB Russia CEB Index added 0.49%, with its spread down by 17 bp. The most significant appreciation was seen in the oil sector, as TNK-BP’s bonds recovered from the sell-off a week earlier. The DB Russia CEB Oil Index added 0.76%.
While the spreads of the sovereign Eurobonds have nearly returned to the levels seen before the credit crunch, the corporates’ spreads still remain significantly higher. The DB Russia CEB Spread is at 295 bp, compared with the 150-200 seen in May-June this year. At the same time, in our view, this gap is not justified by the fundamental factors, especially for the quasi-sovereign issuers, whose credit quality is by and large defined by government support. Therefore, we see more upside potential in the corporate bonds than in the sovereign ones over the months to come.
The OFZ market gradually appreciated last week, as both external conditions and domestic liquidity were favourable. The overnight rates mostly remained in the 5-6% range. The MICEX RGBI Index added 0.31% over the week. Liquidity is likely to remain at the same levels until the month-end tax payment period. We also expect liquidity to improve beyond the current levels towards the end of the year, as increased budget spending fuels the economy with cash.
Most liquid corporate issues also appreciated. Russky Standart bank’s bonds remained among the gain leaders. Issues 8 and 5 added 2.08% and 1.77%, respectively. Other top-performing blue chips of the week are AIZhK 8 (+1.01%) and LUKoil 4 (+0.82%).
Author: Mikhail Volkhonsky ([email protected])