Fixed Income Comment: Improved sentiment towards Russian corporate and banking sector eurobonds was evident yesterday,

Against a backdrop of low volumes and a relatively flat UST performance, Russian
eurobonds were confined to narrow trading ranges yesterday with the Russian
EMBI+ spread managing to tighten a further 3 bps to 229 bps. Still, the move in
Russia’s EMBI+ spread remains consistent with the recent contraction of the
overall EMBI+ spread, and both measures remain within striking distance of their
respective tightest levels. Across the longer duration sovereign issues, renewed
buying impetus in early trading supported a firmer bid in RU30 and the benchmark
bond traded from 1011/4 to the day’s high of 1011/2 before closing at the day’s
opening level. Nevertheless, the move itself resulted in the RU30 yield declining to
6.648% and subsequently led to the spread over 10-year UST narrowing from 249
bps to briefly trade at its tightest point yet, at 246 bps, only to retrace to 248 bps.
With the RU28 spread over RU30 widening to 61 bps during the day, this level
continues to offer value and we anticipate a further bout of crossover flows from
RU30 to RU28. From this perspective, we maintain our view that the RU28 spread
over RU30 is expected to tighten towards its 2004 YTD average of 49 bps.
Elsewhere in Russia, the ARIES curve moved higher and despite limited trading
volumes both the ARIES ’09 euro and the ’14 issues posted notable price gains.
The latter traded higher to reach 11811/16 with the spread over RU30 tightening
marginally to 30 bps. Improved sentiment towards Russian corporate and banking
sector eurobonds was evident yesterday, and following credit ratings
developments regarding the proposed merger between Gazprom and Rosneft,
both credits responded positively and registered notable gains. The more liquid
longer duration Gazprom credits, namely Gazprom ’13, ’20 and ’34 issues
outperformed the market. Similarly, the VTB ’11, NORILSK ’09 and ALROSA ’14
also attracted investor demand and outperformed their respective peers. Russia
has opened this morning with RU30 first traded at 1011/4 (+248 bps) and today’s
key focus will remain on the release of US PPI data. While a stronger figure is
expected, anything short of this outcome is likely to provide further support for UST
and EM debt and we continue to anticipate Russia spreads to tighten further.
The decision by Russian authorities to use excess oil dividends to repay external
debt obligations received recognition yesterday by Rodrigo de Rato, Managing
Director of the IMF. In an interview with Kommersant he is reported to have
identified such a move as the correct strategy to pursue. Still, a note of caution
was delivered with respect to constraining the appreciation of the RUB and thus
avoiding unnecessary inflationary pressures. In our view, and as stated previously
it remains far from conclusive that Russia has suffered to any great extent from
real exchange rate appreciation and a stronger exchange rate is manageable.