Fixed Income Comment: Across the corporate and banking sector eurobonds, the more liquid and longer duration credits were the worst affected by the move in the sovereign curve

With UST weakening ahead of today’s all-important FOMC meeting, EM debt
also suffered yesterday and the Russian EMBI+ index fell 0.47% over the day
with the spread widening 4 bps to 201 bps. Indeed, over the past two weeks
Russian external debt has lost almost 3% with the Russian EMBI+ spread
widening by 21 bps over the same period. Volumes were relatively thin
yesterday as most market participants adopt a cautious approach, albeit with a
bias towards repositioning on the short side, and trading was largely confined to
the more liquid benchmark issues. In Russia, the benchmark RU30 opened at
the day’s high of 1023/4 and traded lower to 102.0 before closing at around
1023/8, with this move resulting in the spread over 10-year UST widening from
around 203 bps to 215 bps at its widest point. Elsewhere in Russia, few trades
actually occurred across the MinFin and ARIES curves and as such prices were
marked lower accordingly. Across the corporate and banking sector eurobonds,
the more liquid and longer duration credits were the worst affected by the move
in the sovereign curve and the Gazprom ’13 and ’34 credits were 1.13% and
1.88% lower in price terms.
Russia has opened this morning on a slightly weaker tone with RU30 trading
lower from 1023/8 to 1021/4, resulting in the spread over 10-year UST widening
from 209 bps to 211 bps and today’s trading patterns in EM will clearly be
dominated by events in the US, namely the release of PPI data (GMT13:30) and
the FOMC interest rate announcement (GMT19:15). With regards to the PPI
release, higher than expected import and gasoline prices suggest that upside
risks remain for the headline index and as such the market focus will remain on
the core measure, particularly given last month’s 0.8% m-o-m rise. In
consideration of the likely impact of the latter event, mixed rhetoric from Fed
officials in recent weeks regarding the duration of using the ‘measured’ phrase
has intensified the debate regarding the exclusion of such wording. As a result,
market uncertainty has increased surrounding the possibility of a modification in
the language of this month’s accompanying statement. While in our view key
input price factors suggest that inflation risks remain firmly entrenched on the
upside and a 25 bps hike is anticipated, we expect the Fed to retain the
‘measured’ approach this month and thus equip itself with more flexibility for the
coming months. At the same time, since referring to the bond market as a
‘conundrum’ in mid-February, 10-year UST yields have increased by around 40
bps and EM spreads widened accordingly, and this may have somewhat
alleviated initial Fed fears of an overpricing of global bond market valuations.