Bi-Weekly FICC Strategy - January 12, 2022. New Year Begins with Rise in Yields, Geopolitical Risks

> Oil: Strong oil price support came at the start of the year from a number of unplanned supply outages (including Libya, Kazakhstan, Nigeria and a deep freeze, which has also disrupted oil flows in Canada and the northern US) and smaller than previously announced SPR releases. This means that 1Q22 commercial stock builds should be smaller than previously envisaged (0.2 mln bpd versus the 2010-19 average of 0.7 mln bpd), which is upbeat especially given how low stocks were as of the end of 2021.> Ruble: Over the New Year break, the ruble tumbled to USD/RUB 77 amid intensifying geopolitical risks, but it has already recovered to 74.5, as the risks seem to have diminished somewhat following the Russia-US security talks. Strong fundamentals and exporters' FX selling should support the ruble through the remainder of January and neutralize the negative effect of an increasingly hawkish Fed.> OFZs and ruble rates: We expect the OFZ curve to continue to become increasingly inverted over the next few weeks: 1-4y papers are still heavily underestimating potential monetary tightening. Tenors longer than 5y could also continue grinding higher in yield as EM local debt funds are suffering outflows.> EM bonds: EM bond spreads have not changed much since our last bi-weekly report. The exception is the single-B space, which has seen 15 bps of tightening on average. We do not think that markets have fully priced in the Fed's more hawkish rhetoric and expect spreads in the double- and triple-B space to widen by 15-20 bps over the next two weeks, in line with the rise in Treasury yields.> FSU sovereign Eurobonds: We see the market continuing to correct in the next two weeks given the prospects for Fed tightening.> FSU corporate and banking Eurobonds: Movements in the corporate bond market will continue to largely depend on the geopolitical backdrop, which remains volatile. Price-wise, we consider Gazprom's euro-denominated perps and Sovcombank's subordinated issues to be more attractive than other Russian corporate bonds.> FSU primary Eurobond market: Silknet is planning to offer a new bond to refinance its 2024 issue amid zero primary activity elsewhere in the region.