Russia gets rate hike, CDS widen; Turkey, Hungary, Ukraine bonds suffer; Kaisa curve drops

By Christine Van Dusen

Atlanta, Dec. 16 – Emerging markets investors were primarily focused on Russia on Tuesday morning, following a surprising rate hike from the Central Bank, which pushed credit default swaps spreads wider.

Russian CDS were trading at 585 basis points during the early session, a London-based analyst said.

“Cash sovereign bonds were initially tighter on the stronger ruble but are now wider once again,” he said. “Russia’s 2030s are 1 point lower from yesterday’s close.”

Market sources were encouraged by the sovereign’s attempt to curb the ruble’s decline but worry that if this fails, the country might impose capital controls.

“We expect the Central Bank will observe the ruble movement first, but is likely to come under pressure to intervene once again,” the analyst said. “Clearly, little ground for optimism in Russia.”

Also contributing to the weaker tone for Russia, oil prices continued to decline on Tuesday, he said.

“Banks and corporates are being very badly hit,” he said, pointing out that OAO Sberbank’s 2024s were about 400 bps wider on Monday morning. “However, we have seen statements from Fitch and Standard & Poor’s this morning that oil and gas companies in Russia will not be badly hurt by the rate increase due to low local currency borrowings and FX earnings.”

A lack of positive news about Russia’s conflict with Ukraine has put pressure on the latter sovereign’s bonds so far this week, said Svitlana Rusakova of Dragon Capital.

The environment has been one of “close to zero liquidity,” she said. “We continue to see client demand in short-dated corporates, but the broad market is willing to offer.”

EM under pressure

Much of the rest of the emerging markets universe saw limited trading but felt pressure on Monday, the analyst said, with Turkey’s credit default swaps spreads widening 20 bps.

“Central and emerging Europe are moving lower – Hungary sovereign bonds are 1 point lower, for example – affected by the general, very strong risk-off tone.”

Asia softens

From Asia, most credits were softer, with high-grade bonds opening 3 bps to 5 bps wider on Tuesday morning, a London-based trader said.

“Price action was surprisingly orderly, despite liquidity being nearly non-existent,” he said. “Oil names performed in line with the market, with crude hitting five-year lows.”

Looking to Indonesia, bonds traded lower, with the long end down about 2 points, the trader said. the sovereign’s 2044s were seen at a low of 121¼, while the 2024s were quoted as low as 111.

“Seen good demand from local accounts scaling in at these levels,” he said.

China property companies down

Property companies from China were seen trading down between 1/8 point and 3/8 point, the London trader said.

China’s Kaisa Group Holdings Ltd. saw its curve drop 3 points after the company asked that trading of its stock be suspended ahead of an announcement of inside information, he said. This was the second time the property company asked for trading to be halted.

PDVSA struggles

Notes from Venezuela-based PDVSA were struggling a bit on Tuesday, a trader said.

“It’s not a total disaster, but we’re also at the point here where it can’t go a whole lot lower without being below what most would say are default recovery values,” he said. “The biggest underperformer is PDVSA 2015s, as a high-dollar-priced bond.”

Flows were very light, he said, but there was some selling from retail investors.

“Several real-money accounts are starting to talk up adding a bit here, but no one is pulling the trigger yet,” he said.

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