Morning Commentary: Ruble rallies; Asian bonds widen; liquidity thin; investors seek to ‘de-risk’

By Christine Van Dusen

Atlanta, Dec. 17 – Emerging markets investors remained focused on Russia and the ruble, which rallied on Wednesday morning after the Finance Ministry announced it bought the currency.

“The currency has given up some gains, but credit default swaps are opening better,” a London-based analyst said. “Capital controls remain a last resort for Russia, but we think, following yesterday’s weakness, the chances of them being implemented are now increasingly likely.”

Inflation is now a major concern for Russians, he said.

“Higher domestic funding costs will further impact economic growth,” he said. “Concerns about unrest in the country are a little premature, but clearly that risk is likely to increase if the current situation persists.”

Meanwhile, the United States is looking to implement tougher sanctions on Russia, particularly its military companies.

“But more importantly for credit investors, [the bill] also authorizes the president to financially sanction OAO Gazprom, if he so wishes,” he said. “The bill also legislates on aid to Ukraine.”

The bill is likely to create a rift between the U.S. and the European Union, he said.

From Asia, high-grade bonds moved 3 bps to 8 bps wider on Wednesday morning amid one-way flows, a London-based trader said.

“The market tried to de-risk,” he said, “but liquidity was extremely thin.”

Chinese property companies saw their bonds close between ¼-point and ¾-point lower while high-yield sovereigns moved 1 point lower, he said.

The rest of the emerging markets bond universe looked stronger on Wednesday, with credit default swaps tightening about 4 bps for Turkey, the analyst said.

In other trading on Wednesday morning, long-dated bonds from Kazakhstan were up about 8½ points, another London-based trader said.

“[KazMunaiGaz National Co.] is looking pretty punchy today too,” he said. “A lot of air before we get to par, but I think it’s fair to say these have been oversold.”

And bonds from Venezuela and Venezuela’s PDVSA traded flat to Tuesday’s close, he said.

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