Fixed Income Comment: The performance of both Russian corporate and banking sector eurobonds was somewhat mixed as the shorter duration credits were marked lower.

Russian eurobonds closed marginally higher on Friday as UST provided the main
impetus and the Russian EMBI+ index posted gains of around 0.2% with the
spread unchanged at +185 bps. Moreover, with Russia outperforming the other
major EM credits over the past week the respective EMBI+ spread over Mexico
has tightened a further 6 bps to 29 bps over this period. Across Russia, volumes
were somewhat passive and the longer duration sovereign issues were marked
higher accordingly and the curve flattened further over the week. The
benchmark RU30 opened at a 1057/16 and traded in a 3/16 range before closing up
at 1055/8, with the spread over 10-year UST confined to a 196 bps to 198 bps
range. Few trades occurred in the RU28 credit and the respective spread over
RU30 was relatively unchanged at 51 bps. The performance of both Russian
corporate and banking sector eurobonds was somewhat mixed as the shorter
duration credits were marked lower. In contrast, positive news flow stemming
from the Houston Court ruling and the likely implications for the Gazprom-
Rosneft merger led to marked gains across the longer dated Gazporm credits
and the ’34 issue increased 0.85% in cash price terms (spread around +284 over
10-year UST notes).
Despite Russia opening lower this morning on initial trading, price levels have
firmed slightly and RU30 is quoted at similar levels to Friday’s close, at 1051/2-5/8
(+198 to +196 over UST). Looking ahead, we expect both Russia and EM debt
performance to be dominated by developments in UST this week and the
eventful US economic calendar. Indeed, the focus shifts from inflation to labour
market conditions with the market attention firmly entrenched on Friday’s nonfarm
payroll report. In the absence of any significant deviation in the preceding
data releases we expect a relatively cautious approach throughout the week and
tight price ranges are anticipated, albeit with an upward bias for yields. Other
noteworthy data releases include consumption and new home sales (today), ISM
survey and car sales (Tuesday), ISM non-manufacturing survey and jobless
claims (Thursday). At the same time, the market will also closely monitor Fed
Chairman’s testimony on Wednesday on the economic outlook to the House
Budget Committee. In our view it seems unlikely that the Fed Chairman will
depart from the recent rhetoric in his recent Humphrey-Hawkins testimony and
the overall event risk for UST is expected to be limited. That said, employment
conditions continue to show signs of improvement and any marked pick-up in
Friday’s data is likely to push 10-year UST yield towards the 4.30% level and
under such conditions we would anticipate Russian spread levels to tighten
further.