Fixed Income Comment: Elsewhere in Russia, both the longer duration corporate and banking sector credits witnessed modest selling pressures and the more liquid Gazprom cluster underperformed

Russian eurobonds suffered on Friday following the surprisingly stronger than
expected US PPI data release and subsequent sell-off in UST. While the move
itself was largely in line with the declines witnessed across other EM benchmark
credits, the rise in EM yields failed to keep pace with UST yields and EM spreads
tightened accordingly. Indeed, both the Russian and overall EMBI+ spread
measures tightened to record levels over UST, at 186 bps and 347 bps
respectively. Volumes across Russia’s sovereign curve were somewhat modest
and activity was confined to the longer duration RU28 and R30 credits. The
benchmark RU30 opened at 1061/8 and traded lower to 1059/16 before closing at
10511/16, and subsequently contributed to 1.0% price decline over the past week.
Although RU30 yields rose by around 12 bps over the same period, this move
was offset by 10-year UST yields rising 16 bps to reach 4.25%, and as a result
the RU30 spread tightened 4 bps to close on Friday at a record +195 bps.
Despite RU28 underperforming the curve on Friday the respective spread over
RU30 held firm in its new sub +55 range and traded between +49 and +51 bps.
Elsewhere in Russia, both the longer duration corporate and banking sector
credits witnessed modest selling pressures and the more liquid Gazprom cluster
underperformed.
Russia has opened today on a slightly weaker tone with RU30 trading at 1055/8 -
9/16 range (+196 bps over 10-year UST yields) and given today’s closure of US
markets (Presidents Day) we anticipate activity to remain modest at best.
Nevertheless, this week’s US economic calendar contains key data and event
driven risks with the release of the all-important CPI and February’s FOMC
minutes (Wednesday). With 10-year yields breaking through the key 4.25%
threshold on Friday, the January spike in core PPI is likely to intensify the focus
on the CPI release, given that this measure provides the decisive catalyst for
interest rates to move higher. At the same time, the release of FOMC minutes
will also be closely examined for any further indication on Fed rhetoric regarding
inflation risks. While we expect some resistance in UST yields pushing higher, a
substantial upward deviation in the core CPI measure from consensus estimates
would result in 10-year yields retesting the recent high of late December (4.32%).
In such instances we anticipate further pressure on EM debt, albeit at a lower
intensity, and as such witness a further compression in spread levels. We
continue to view the +190 bps level as the short-term target for RU30 spread.