Fixed Income Comment: Following the recent sell-off in the ARIES curve, buying was evident yesterday

Russian eurobonds were confined to narrow trading ranges yesterday and with
general sentiment towards EM credits somewhat nervous, Russia’s EMBI+ index
fell 0.52% on the previous close. At the same time, the November TIC data (net
foreign purchases of US securities rising to US$81.0 billion from US$48.1 billion in
October) proved UST price supportive and the late upturn in UST resulted in the
Russian EMBI+ spread widening 6 bps to reach 226 bps, its highest level since
mid-December. Amid moderate volumes the sovereign curve witnessed a slight
steepening as selling pressures occurred across the longer duration credits. The
benchmark RU30 opened at 10211/16 and traded in a 5/16 range throughout the day
before closing unchanged in New York, with the spread over 10-year UST confined
to a 231 bps to 234 bps range. Following the recent sell-off in the ARIES curve,
buying was evident yesterday and the more liquid ARIES ’14 issue recovered
some of its recent losses, trading from 1213/4 to the day’s high of 1223/8. A move
that resulted in the ARIES ‘14 spread over RU30 tightening from +1 bps to -6 bps.
Elsewhere in Russia, both corporate and banking sector eurobonds were generally
weaker, particularly across the Telecoms sector. Indeed, reports regarding a claim
against Vimplecom’s subsidiary in Kazakhstan resulted in selling across the
company’s eurobonds and the Vimpelcom ’05, ’09 and ’11 were marked
considerably lower. At the same time, further clarification of MTS’ forthcoming 7-
year USD eurobond led to both MTS ’08 and ’10 easing slightly. ALROSA credits
also suffered as the company announced a decision to tap its outstanding ’14
issue and the credit was 0.66% lower in price terms.

Russia has opened this morning with RU30 trading in a 1023/4-11/16 range (+235
bps to +236 bps over UST) and we expect prices to remain rangebound ahead of
today’s all important US CPI data release. Indeed, the focus on inflation has
intensified given the Fed’s recent tilt towards a more hawkish rhetoric on inflation
risks, as detailed in the latest FOMC minutes. With the much weaker than
expected December PPI largely influenced by lower gasoline prices, the energy
component of the CPI is likely to have a similar impact on today’s headline index.
That said, the focus will remain on the core CPI measure, and given our
expectations of a benign outcome, we expect no significant shift in the Fed’s bias
at next month’s FOMC.