Fixed Income Comment: We expect the market to make use of this period to reassess the fair value for Russian debt

With the local market absent from ‘play’, trading volumes were relatively subdued
yesterday and Russian eurobonds drifted lower over the day. Indeed, trading was
largely confined to the more liquid longer duration issues and with sentiment driven
by profit-taking the benchmark RU30 opened at 1009/16 and moved lower to close
at 1003/16. While this move resulted in the RU30 spread over 10-year UST
widening from 257 bps to 260 bps at close, at current levels the spread still
remains around 16 bps tighter than levels witnessed a week ago. Elsewhere in
Russia, activity was evident across the long end of the ARIES curve and with
trading largely spread driven, the ARIES ’14 spread over RU30 narrowed further
from 30 bps to 27 bps. Russian corporate and banking eurobonds posted a
relatively stagnant performance yesterday, excluding the longer duration Gazprom
credits that were marked lower in line with the sovereign curve. Still, latest market
news suggests that investor appetite for Russian corporate risk is far from waning
and the order book for ALROSA’s forthcoming 10-year eurobond has attracted an
estimated US$1.2 billion. The issuer is likely to opt for price as opposed to quantity
and a YTM of 9.0% is anticipated with an issue size of US$300 million. Russia has
opened this morning with RU30 first trading at 1005/16-3/16 and while this week’s
FOMC meeting and accompanying statement remain the key focus, in the absence
of any shift in Fed rhetoric the forthcoming public holidays across the US, Brazil
and Turkey suggest a relatively subdued period for EM debt. From this
perspective, we expect the market to make use of this period to reassess the fair
value for Russian debt, particularly given the recent retesting of new all-time highs,
both on a price and spread basis.