Morning Commentary: Russia gets rate hike, CDS widen; Turkey, Hungary under pressure

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 swap spreads wider.

The Central Bank of Russia hiked interest rates overnight to 17% from 10½%.

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, [there is] little ground for optimism in Russia.”

Also contributing to the weaker tone for Russia: Oil prices continued to decline on Tuesday, and no big moves were made to address the conflict with Ukraine, 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.”

Much of the rest of the EM universe saw limited trading but felt pressure on Monday, he said, with Turkey’s credit default swap 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.”

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