Fixed Income Comment: Despite a weaker UST performance renewed buying interest in Russia led to notable price gains across the sovereign curve

100 was yesterday’s magic number with both RU30 retesting par value and
Russian FX reserves breaking the US$100 billion threshold. Despite a weaker
UST performance renewed buying interest in Russia led to notable price gains
across the sovereign curve and the Russian EMBI+ spread tightened 9 bps to 264
bps. In addition to strong demand for both RU10 and RU28 issues, the benchmark
RU30 traded from an opening level of 993/8 to reach an intra-day high at par value
before closing in New York at of 9913/16. With the RU30 spread over 10-year UST
still perceived as fair value at the 290 bps level, local and international market
participants were encouraged to trade higher and against a backdrop of rising UST
yields, yesterdays price move resulted in a further tightening in the RU30 spread to
284 bps. At the same time, a reassessment of ARIES related risk gathered pace
and led to price gains across the curve. The longer dated ’14 issue outperformed
the market, trading higher to reach 1165/8 with the spread over RU30 narrowing 10
bps to 38 bps. Although the corporate and banking sector eurobonds opened
relatively flat, most credits responded positively to the move in the sovereign curve
and prices were generally bid higher across the board. Typically, the quasisovereign
perceived Gazprom credits were the largest beneficiary of this move,
particularly the ’09 and ’34 issues. A continuation of this positive sentiment is
evident in early trading, with RU30 quoted in the 993/4-100 range, and following
yesterday’s brief encounter with the psychological par level we anticipate a further
strengthening and a tightening in the spread towards the 280 bps level.