Fixed Income Quarterly. April 2018 - Primary Issues, Secondary Concerns

> EM primary issuance to keep coming - but now in the face of higher volatility. EM bond markets saw record primary issuance in 1Q18, a trend that will likely continue through sheer inertia, as issuers will be reluctant to scrap plans even if market conditions deteriorate. But the higher volatility may push primary premiums up, which will compel investors to move into the higher-yielding primary issuance, thus possibly negatively affecting the secondary market.> Russian assets again saddled with geopolitical risk premium. A geopolitical risk premium of around 100 bps appeared in 2014. After a turbulent 2015, it started to decrease in 2016 and finally disappeared in 2017. But this was not necessarily justified. Although the Russian economy had adjusted to the lower oil prices and sanctions introduced in 2014-15, the geopolitical risk was far from over. In light of recent developments, a premium of about 50 bps is back.> Ruble CPI-linked OFZs have good defensive qualities. CPI linkers are currently trading with real yields at 2.65-2.90%. The premium of 20-25 bps of the longer issue over the shorter one seems fair. Real yields should fall as monetary policy continues to normalize. The CBR might lower what it sees as the inflation-neutral real rate to below 2%, which would be positive for CPI linkers. We consider sanctions to be neutral for real rates in the medium term and thus do not expect real yields to react much to the various twists and turns in the sanctions story.> NC KMG buys back of all of its "old-style" bonds. The company financed the transaction with a $3 bln multi-tranche offering of new long-dated paper. This is its second large corporate action in public debt markets that has been beneficial to holders in the last three years. The placement will affirm NC KMG's status as a proxy exposure to Kazakh sovereign risk, for which it is easy to go either long or short. With time, long-dated NC KMG bonds may come to be viewed as a good proxy exposure to the FSU oil and gas sector in general.> Ukrainian banking sector in midst of major transformation. As the operating environment showed the first signs of stabilizing last year and confidence in banks seems to be gradually recovering, the cleanup of sector balance sheets continues. Meanwhile, the National Bank has tackled the issue of widespread related-party lending practices and has taken significant steps to sort out insolvent banks. We go through the bank's recent efforts to rehabilitate the sector and look at the valuation of state-controlled banks' outstanding Eurobonds.> Eurotorg becomes Belarus's first issuer of corporate Eurobonds. The strong performance in EM bond markets (including the CIS) last year has opened the door to companies that previously could hardly have imaged borrowing in the public markets. One such example is Belarus's leading food retailer, Eurotorg, which last October issued $350 mln in debut 5y Eurobonds. We do not anticipate any negative credit events for the company in the medium term, so we are rather positive on the credit. Nevertheless, this is the kind of credit that investors will need to keep a close eye on.