Fixed Income Comment: On a spread basis and in the absence of any significant flows, we expect RU30 to remain confined to its recent 300 bps to 320 bps range, albeit with a slight tightening bias

Amid low trading volumes Russian eurobonds were confined to tight ranges
yesterday, as investor enthusiasm towards both Russia and the wider EM asset
class stalled. With the sovereign curve remaining relatively flat during the day the
late pick up in UST contributed to the Russian EMBI+ spread widening 5 bps to
reach 296 bps. At the long end of the curve, RU30 opened at the day’s high of
961/4, moving to a low of 961/16 before the benchmark bond closed at 961/8,
reflecting a slight widening in the RU30 spread over 10-year UST from 308 bps to
312 bps. The ARIES cluster of credits was also relatively unchanged both on a
price and spread basis yesterday, the latter referring to comparable Russian
sovereign benchmarks. In contrast, a positive tone towards Russian corporate
eurobonds led to improved activity and modest price gains were registered across
most sectors. In particular, the telecoms sector witnessed increased buying and
both the MTS ’08 and ’10 issues outperformed the market, up 0.82% and 0.75%
respectively. Elsewhere, the MMK ’08 issue was bid higher on the strength of S&P
upgrading the company’s long-term corporate credit rating to BB- from B+ (stable
outlook). Russia opened this morning slightly higher compared to New York’s
close, RU30 first traded at 963/16 (+312 bps over UST), and with risks to today’s US
retail sales data release on the downside, a firmer UST market is likely to provide
further support for current price levels. On a spread basis and in the absence of
any significant flows, we expect RU30 to remain confined to its recent 300 bps to
320 bps range, albeit with a slight tightening bias.