Fixed Income Comment: While reports suggest that Russia is seeking a ‘haircut’ of around 10%, thisappears both sizeable and optimistic

Positive sentiment towards EM debt and expectations of Russia concluding an
agreement on early Paris Club debt repayment provided the impetus for Russian
eurobonds to trade higher yesterday and the Russian EMBI+ index rose 0.6% to
an all-time high with the spread tightening marginally to 215 bps. Despite Fitch
upgrading Turkey’s long-term sovereign rating from B+ to BB-, Russia
outperformed its EM peers and the Russian EMBI+ spread traded 4 bps tighter
over Mexico’s EMBI+ spread measure to 45 bps. At the same time, supply
concerns across the more vulnerable EM credits were somewhat dispelled by the
substantial demand for Turkey’s new 20-year eurobond, and ultimately resulting in
the original issue size being doubled to US$2 billion. In Russia, decent volumes
were evident across the longer dated issues and the sovereign curve flattened
further as yields on the RU18, R28 and RU30 all moved lower. The benchmark
RU30 opened at 103 in London and traded firmer throughout the day to reach a
new-all time high of 1033/4 in late trading, before closing in New York at 1039/16.
Despite UST yields falling slightly in London trading the move in RU30 still resulted
in the spread tightening from 227 bps to 220 bps, however as UST fell further in
late New York trading RU30 subsequently experienced end-of-day profit-taking
and the RU30 conceded its gains to close unchanged over the day. Across the
curve, RU28 also registered notable gains and rose over 2 points to reach 1651/2,
its highest level since January 2004, with the spread over RU30 trading slightly
wider at 59 bps. Elsewhere in Russia, both the MinFin and ARIES curves flattened
as the longer dated credits outperformed and the RU30 spread over ARIES ’14
traded at 17 bps before tightening to around 12 bps.
Russia has opened this morning slightly weaker with RU30 trading in a 1031/8-3/8
range (+231 bps to +227 bps over UST) and given the resistance to push further
yesterday and test the psychological 104 level we view the potential for some
limited profit-taking ahead of today’s US PPI and IP data releases. While the
RU30 spread has widened almost 10 bps from the tighter end of its recent trading
range any further move towards the +240 bps level is likely to be met with renewed
buying and support is expected at these levels. Although the prospect of Russia’s
early Paris Club debt repayment is largely factored into current price levels we still
view any official announcement as providing further support for current price
levels. At present, Russian officials remain locked in negotiations with Paris Club
creditors over their pursuit for a discount for undertaking the early repayment.
While reports suggest that Russia is seeking a ‘haircut’ of around 10%, this
appears both sizeable and optimistic.