Fixed Income Comment: We continue view the spreads over UST at the long end of the sovereign curve offering value

Russian eurobonds strengthened further on Friday, boosted by renewed optimismregarding Russian debt valuation and against a backdrop of firmer UST, Russiacontinued to outperform the wider EM debt class with the Russian EMBI+ spreadnarrowing 4 bps to reach 260 bps. Indeed, the latest price move in Russian external debt resulted in the overall EMBI+ spread over Russia widening to 160 bps, its widest level since mid-July. At the long end of the curve, the benchmark RU30 broke convincingly through the psychological par value and traded from anopening level of 997/8 to a high of 1003/8in New York, and represents a 1.4% increase in the cash price terms over the week. With the yield on 10-year UST declining to 3.984% the RU30 spread narrowed from 282 bps at opening to closeat the higher end of its recent trading range, at 277 bps. While both the RU18 and RU28 also registered notable price gains on Friday, up 0.3% and 0.4%b respectively, the latter credit has failed to tighten on a spread basis and remainsrangebound at around 59-60 bps over the benchmark RU30. Similarly, the ARIES credits continued to benefit from the strength in the sovereign curve and the more liquid ARIES ’14 traded to a new high of 1173/8 with the spread over RU30narrowing to 35 bps, its tightest level since issuance. Russian corporate and banking sector eurobonds also moved higher as the more liquid and longer duration credits benefited most. In particular, continued buying was evident across the VTB credits with the recent VTB ’11 issue outperforming (currently rated one notch above the sovereign by Moody’s), contributing to a near 3% rise in the priceover levels witnessed a week earlier. Russia has opened this morning supported by an overnight strengthening inUST and the benchmark RU30 currently trades within a 1003/8-5/8 range (+283to +280 bps over UST). While over the near-term this apparent reassessment of valuation across the Russian curve and pre-emptive buying in anticipation of a possible ratings upgrade appears sufficient for price levels to consolidate abovepar, in our view the extent of the latest price advance suggests an element of vulnerability to profit-taking. In particular, the market focus this week returns to the US economic calendar and stronger than expected data may provide the impetusto sell ahead of next week’s non-farm payroll data. At the same time, as the buildup to the US presidential elections (2 November) gathers pace global markets in general remain exposed to shifts in sentiment and likely policy implications fromthe respective candidates. From this perspective, we continue view the spreads over UST at the long end of the sovereign curve offering value and in view of the current technicals we continue to look for a further tightening over the medium term to retest the all time low of 248 bps (9th January 2004).