Fixed Income Comment: Indeed, we consider that the overall impact of the early repayment is largely priced into current levels and the sovereign curve flattened accordingly

Russian eurobonds were slightly stronger yesterday, albeit in the absence of any
strong UST direction, and the Russian EMBI+ index posted gains of around 0.1%
over the day with the spread tightening marginally to 183 bps. The firming in
price levels was largely in line with other EM benchmarks and Russia’s EMBI+
spread over Mexico contracted 2 bps to 31 bps. At the same time, the market
shrugged off comments by Finance Minister Kudrin that Russia has not received
any demand by Paris Club creditors for a premium on its proposal to undertake
early repayment and gains were largely registered across the longer duration
credits. Indeed, we consider that the overall impact of the early repayment is
largely priced into current levels and the sovereign curve flattened accordingly.
RU30 opened at 1051/8 and drifted higher before closing in New York at 1051/8
with the spread over 10-year UST confined to a 190 bps to 192 bps trading
range. With few trades actually occurring across RU28, the respective spread
over the benchmark bond was relatively unchanged at around 49 bps. In
contrast to the sovereign curve, both the longer duration MinFin and ARIES
credits were marked slightly lower and the spread on the ARIES ’14 widened
from parity to around 2 bps. Volumes across Russian corporate and banking
sector eurobonds were somewhat moderate in comparison to previous trading
sessions and despite reports regarding Rosneft’s opposition to the structure of
the merger with Gazprom, the latter credits were all marked higher. While prices
across the telecoms and industrial sectors were generally bid higher, the Sibneft
’09 outperformed the market, rising 1.12% in cash price terms, with the spread
over UST tightening by 57 bps over the past week.
With UST prices slightly weaker this morning Russia’s benchmark bond is quoted
in a 105-1051/16 range (+192 bps mid-price over UST) and a cautious tone is
expected to prevail ahead of today’s all-important NFP data release. While the
consensus estimate of +225k signals that the market anticipates a marked
improvement in labour conditions, the under performance of the NFP measure
over the past three months suggests that upside risks remain. Indeed, given that
last months possible weather distortions are absent, weekly jobless claims data
remains positive (4-week MA currently at a 4-year low of 307k), and both the
Monster.com and ISM non-manufacturing employment indexes have reached
survey highs, we anticipate an outcome in excess of 250k. In this instance we
expect UST yields to push further ahead through the 4.40% threshold and
Russian spread levels to tighten accordingly.