Fixed Income Daily: We believe the widening of emerging market bond spreads to be temporary and we anticipate it to give way to their narrowing rather soon

EXTERNAL DEBT MARKET
The US Treasury yields stabilized yesterday for the first time in a week and
began decreasing by the end of the day. However, this failed to prevent
further significant declines in emerging bond markets. The Russia-30 hit a
low since the beginning of year, traded at 102.875 yesterday, while its
spread widened to 200 bp. The EMBI+ Russia country spread widened by
14 bp during one day to 195 bp over US Treasuries. Practically all the
developing countries’ spreads widened considerably (Mexico: +11 bp,
Turkey: +22 bp, Brazil: +7 bp, Ecuador: +20 bp).
By the evening, the 10Y UST yield began to decrease from 4.58% in the
afternoon to 4.50% by the market close in New York. This increase in UST
prices was favored by US dollar strengthening in the forex market from
1.3470 to 1.3330 USD/EUR over the last two days. As a result, Russian
Eurobonds partially retraced their losses by the end of the day. The Russia-
30 is now traded around 103.375-103.500, while its spread remains about
198 bp.
We believe the widening of emerging market bond spreads to be temporary
and we anticipate it to give way to their narrowing rather soon. We see a
Russia-30 spread of 200 bp as a buying opportunity and we expect a
spread of some 150 bp by the end of the year. However, we recommend to
hedge the most part of long positions in Russian Eurobonds through buying
the spread (long the Russia-30 and short the 10Y UST).
LOCAL DEBT MARKET
Non-aggressive selling prevailed in the market on Monday. The majority of
first-tier issues lost 0.1-0.3%, while second-tier bonds were down 0.2-0.5%
on average turnover. The decline took place throughout the broad range of
issues, with no obvious outsiders. Selective buying was noted in the third
tier, which, however, could not improve the general market situation. The
main negative factor driving the ruble bond market was further decline of
Eurobonds, with the Russia-30 having returned yesterday back to its levels
of the beginning of the year. Furthermore, the Russian component in the
EMBI+ index has been one of the worst performing ones for the month,
with only Bulgaria and Brazil left behind. The EMBI+ Russia spread has
remained unchanged for the month at 193 bp, the global EMBI+ index
spread has narrowed by 4 bp, and the spreads of the countries not falling
into the investment category have narrowed on average by 20-30 bp. It
should be noted that along with Sovereigns, corporates also retreated
yesterday, despite their having shown “better than the market” performance
recently. At the same time, the domestic market almost entirely lacks its
own trading ideas and growth potential, whilst there is too much cash in the
market for a full-fledged correction. Still, long-term expectations of interest
rate increases prevail in the market. Thus, investors are using any more or
less suitable excuses for profit taking. Yet the more so since weakness in
the secondary market may bode well in the long term for a premium in the
primary market, which is beginning to liven up. Nevertheless, we believe
that the factor of excess ruble liquidity should prevail again in the near
term, which would cause restoration of a sideways trend.