Fixed Income Comment: Activity was largely dominated by the failure of Russia and the Paris Club creditors to reach an agreement regarding an early debt repayment

Despite the closure of US markets for Martin Lurther King day, decent trading
volumes were surprisingly evident across Russian eurobonds yesterday and the
Russian EMBI+ spread widened 4 bps to reach 219 bps. Activity was largely
dominated by the failure of Russia and the Paris Club creditors to reach an
agreement regarding an early debt repayment and as a result of reassessing
current valuations, the ARIES credits suffered most. At the long end, the ARIES
’14 witnessed selling pressures and traded lower from a 1225/8 to 1211/2, its lowest
level since early December, with the spread over RU30 widening markedly from -7
bps to +6 bps. Similarly, the shorter dated ARIES ’07 EUR FRN issue was also
sold-off and subsequently fell from around 1051/8 to close lower at 10415/16. The
main stumbling block in successfully concluding an agreement with the Paris Club
creditors remains Russia’s pursuit for a discount, reportedly around 10%, for
undertaking the early repayment. Despite Russia’s abundant cash resources and
its largest Paris Club creditors, namely Germany, Italy and France, in urgent need
of a boost to their underlying fiscal positions, we view a ‘haircut’ of this magnitude
as both sizeable and optimistic. Russia’s sovereign curve failed to avoid such
selling pressures and the benchmark RU30 opened at around 103 and traded
lower to close at 1027/8 in London, with the respective spread over 10-year UST
widening to 230 bps. While activity across Russian corporate and banking
eurobonds was extremely subdued, Interfax report that MTS plans to issue a 7-
year eurobond before end-January. Following the recent maturity the MTS ’04
issue, the move would both extend the MTS maturity profile and also represent a
key gauge regarding investor sentiment towards Russian corporate risk. While an
issue size is yet to be announced the current ’08 and ’10 credits were both issued
at US$400 million and a similar magnitude is expected for the forthcoming issue.
In view of current valuations we would expect the issue to be priced at the tighter
end of a 8-8.5% yield range, thus taking advantage of the positive sentiment
towards Telecom credits that has prevailed in recent weeks.

Russia has opened today with RU30 trading in a 1021/2-11/16 range (+234 bps to
+232 bps over UST) and market direction is likely to be dominated by UST ahead
of tomorrows all important CPI release. The release of US Treasury International
Capital (TIC) system data for November remains the key data highlight today,
particularly given the substantial decline in net foreign purchases of US securities
in October, down US$19.4 billion from the previous month to US$48.1 billion.