Fixed Income Daily: A sell-off in emerging bond markets is going on

EXTERNAL DEBT MARKET

A sell-off in emerging bond markets is going on. The fall is due to selling by
a number of funds reducing their investments in emerging debt markets
during a period of interest rate increases.
Despite stabilization of the 10Y UST yield around 4.47-4.52% yesterday,
Russian Eurobonds saw further declines. The Russia-30 depreciated to
103.000 by the end of the day, while its spread widened to 206 bp against
some decrease in the 10Y UST yield.
However, the price of the Russia-30 fell to a new YTD low of 102.375 in
late New York trading, and this morning it plunged to 101.875 on panic
selling. The spread was as wide as 243 bp. By midday in Moscow, the
Russia-30 stabilized around 102.250 at a spread of 208 bp.
We consider this sell-off to be a good opportunity to buy cheaper Russian
Eurobonds. We believe that the spread of the Russia-30 should return
below 200 bp quite soon, and should narrow to 150 bp in the future.
Excellent fundamental and debt parameters of the country should outweigh
all risks, and investors should renew their active purchases of Russian
Eurobonds soon.
We do not change our target price of the Russia-30 as of the year end,
which is about 105.125, and its spread about 150 bp. Therefore, we
recommend buying the Russia-30 at the current levels.

LOCAL DEBT MARKET

Trading was rather dull yesterday, with no obvious leaders and outsiders.
Most issues were mixed within +/-0.1-0.3 %. The yield curve of long issues
rose to 7.52-8.31%. There was no large-scale reinvestment of proceeds
from the OFZ 26003 redemption (a volume of some RUB 1.25 bn) in the
government bond market yesterday. With today\'s coupon payments (some
RUB 5.4 bn), total demand at today’s OFZ 46018 auction may reach RUB
7 bn, while the announced volume of the bond is RUB 10 bn. The MoF’s
primary consideration are institutional investors dominating in the
government debt market rather than speculators. Also, implicit guidance
conveyed by MoF representatives to market participants is for long OFZ
yields of 7.5-8.6% for the year. Owing to this, we do not expect the yield at
the auction to exceed 8.6% annualized, the more so as this corresponds to
the current OFZ yield curve.