Markets update: Quite and bitter start of the post-QE2 week / Belarus-Ukraine spread widen

Quite and bitter start of the post-QE2 week

Trading activity in Russian/CIS bonds was subdued yesterday. Thus, market interest was skewed towards selling, which in our view, came as result of local players apparently moving to take profits after the previous week's rally. Starting from the open, bonds took repeated hits. As a result, prices of longer-dated issues dropped 50-75bp. Quotes on the benchmark issue RUSSIA 30 (YTM 4.04%) declined 50bp, we even noted a deal at 121.375pp. The Russian 5-year CDS-spread widened 6bp to 136bp.

In the corporate universe, oil and gas bonds were pummelled with GAZPRU 37 (YTM 6.57%), GAZPRU 20 (YTM 4.29%), LUKOIL 19 (YTM 5.77%) shedding almost 1pp in price. We also saw sellers in VEBBNK 20 (YTM 5.86%), VTB 20 (YTM 6.43%), however, their quotes moved down almost 30-40bp. Investors didn't much interest to other issuers yesterday, but by and large bonds moved lower on brokers' screens.

Belarus-Ukraine spread widen

We found that spread of BELRUS 15 (YTM 7.69%) to Ukraine USD curve has widened 50bp to 150bp since the beginning of October. We recap that Belarus has comparable credit ratings with Ukraine: B+/B1/B+ and B+/B2/B+, respectively. The spread widening was mainly driven by the rally in Ukrainian bonds. Possibly, the resilience in BELRUS 15 could be attributed to rumours surrounding new supply from Belarus. However, discussion was about a MICEX-listed RUB bond, so we doubt a deal like this might have dramatically changed investors' perception of country's USD issue.

Moreover, as we have pointed out in yesterday's Fixed income monitor, UKRAINE 15 on its own looks undervalued relatively to the sovereign curve. Therefore, BELRUS 15 is a good play, first, on credit spread convergence between two countries and, second, on the flattening of the hump-shaped Ukraine yield curve. We see a fair spread between BELRUS 15 and UKRAINE 15 of not more than 100bp.


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