Russia credit has rallied meaningfully year-to-date, driven by a confluence of factors: the rebound in oil prices, the stabilization of Russia’s external position and the rally in the rouble, the Minsk II agreement, defensive/underweight positioning by investors earlier inthe year, and the local carry trade driving a rally in Russia $30s in particular.“Some of these factors certainly justify improved sentiment towards Russia, while others, could prove to be transient. In particular, the strong local bid for Russia $30s should fade and ultimately reverse”, says Barclays. Indeed with the recent hike in the FX repo rate by the CBR to LIBOR + 250bp (for the 1y repo), the local ‘carry trade’ in Russia $30s has become uneconomical for local banks. Notably, the total amount taken up in the FX repo facility has stagnated over the past few weeks and even dropped slightly to $33.8bn recently. With Russia $30s expensive on the curve and repo rates having started to normalize, analysts think that there is little upside for Russia $30s at present. Switching from Russia $30s into other on-the-run bonds on the USD curve (such as Russia $20s) before, based on the above rationale, suggests Barclays. However, recent moves might have created value in the EUR20s in particular. As sentiment towards Russia has stabilized, most relative relations in the Russia credit complex have normalized. For example, curves have re-steepened, and quasi-sovereigns now trade at a spread to the sovereign broadly comparable to levels last year. EUR20s, however, have lagged the USD sovereign paper very meaningfully in the rally and the EUR-USD spread differential is now close to record levels. While the more limited liquidity in the Russia EUR paper may be partially responsible for this dislocation in an environment of lower volatility and improved sentiment, the current spread differential between Russia EUR20s and $20s more than compensates for this and analysts hence recommend switching accordingly.
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