Fixed Income Comment: Elsewhere in Russia, strong demand was once again evident

Despite an initial bout of buying across Russian eurobonds a weaker UST market
in late trading led the sovereign curve lower, offsetting the early morning price
gains and subsequently the Russian EMBI+ spread closed 3 bps wider at 263 bps.
Amid subdued volumes, activity was largely confined to the long end of the curve
and the benchmark RU30 opened at 991/4, trading to an intra-day high of 991/2
before closing in New York at 993/16. With the yield on the 10-year UST note
breaking through the 4.10% level this price move in RU30 resulted in the spread
over UST widening from 279 bps at opening to 281 bps at close. A similar
performance was witnessed across Russian corporate and banking eurobonds
with early morning strength being conceded to late profit taking and the more liquid
credits followed the sovereign lower. Still, the underlying positive sentiment
towards Russian credits is highlighted by the market largely discounting the news
that the Justice Ministry is expected to proceed with the sale of Yuganskneftegaz
at a valuation of US$10.4 billion compared to the independent appraiser’s, DrKW,
recommended\' price range of US$15.7-18.3 billion. Elsewhere in Russia, strong
demand was once again evident at the long end of the ARIES curve and with the
ARIES ’14 outperforming the market, up from 1153/4 to a new high of 1163/16, the
spread over RU30 narrowed to 41 bps, its tightest level since issuance.
Russia has opened this morning with RU30 trading in a 991/8-983/4 range (+280 to
+285 bps over UST) and once again in the absence of any significant US
economic data today’s direction is likely to be determined by the continuing
revaluation of current price levels and reassessment of global macroeconomic
prospects. While par value clearly remains the key psychological level for RU30,
the recent trajectory, up 2.3% on levels witnessed a week earlier, suggests that
profit taking at current levels is likely over the short-term. On a spread basis, we
continue to view the RU30 spread establishing a new trading band below the key
300 bps level. At the same time, a revaluation across the Russian curve is also
likely to take hold, particularly across the RU28/RU30 and ARIES ‘14/RU30 spread
levels, of which the latter has traded this morning to a new low of 38 bps (1161/4).