Fixed Income Comment: Nevertheless, underlying investor appetite for Russian corporate eurobonds is far from waning

Profit taking was clearly the main theme yesterday across Russian eurobonds as
market participants sought to take advantage of the recent rally and prices drifted
lower in London trading with the Russian EMBI+ spread widening 4 bps to 267
bps. Volumes remained subdued although increased demand for the short end of
the sovereign curve was evident, particularly across the RU05. At the long end of
the curve, RU30 opened at 991/8 and traded to a low of 985/8 before a late rally in
UST provided support and the benchmark bond closed unchanged over the day.
On a spread basis, the RU30 spread over 10-year UST widened from 280 bps at
opening to 284 bps at the day’s low and following the late pick up in prices closed
at this level. Despite the ARIES ’14 spread over RU30 widening marginally from
its tightest level of 37 bps in early morning trading to close at 39 bps, the
underlying spread appears to have consolidated at levels below 50 bps and
established a new trading range. With regards to Russian corporate and banking
eurobonds the longer dated and more liquid credits suffered most from the midsession
weakening in the sovereign curve and profit taking was evident across the
Gazprom cluster of credits. Nevertheless, underlying investor appetite for Russian
corporate eurobonds is far from waning as highlighted by yesterday’s placing of
the Vimpelcom 7-year US$300 million eurobond, which attracted an estimated
US$2 billion of orders. The bond was initially priced at 8.375% yield and traded
tighter to 8.125% (+478 bps over 5-year UST), compared to a 10.0% pricing of the
Vimpelcom ’09 (issued in June) which currently trades at around 440 bps over 5-
year UST.
Russia has opened this morning with RU30 trading in a 991/16 -5/16 (+286 bps to
284 bps over UST) range and with Brent crude oil continuing to trade above
US$50 pb Russia eurobonds are expected to remain well bid given the positive
impact on UST resulting from the associated concerns regarding economic growth
prospects. Over the near-term RU30 is likely to meet resistance at the
psychological par level, still, on a medium term basis the underlying attractiveness
of Russian sovereign credits will be further enhanced by the country’s oil credit
status and ongoing global search for yield. While the US economic calendar
returns to focus today, the release of the US trade balance, import price index and
jobless claims are unlikely to provide any substantial insight into dispelling the
current softness in US economic data. With the latter indicator being noticeably
volatile over the past month the market is likely to concentrate on the 4-week MA
measure as a more reliable gauge of latest employment conditions, which currently
exhibits an upward trend. In addition, keynote speeches by the Fed’s Bernanke
and Geithner will also be closely watched.