Fixed Income Quarterly. February 2018 - Nothing Lasts Forever

> EM issuers in a rush to borrow. Emerging markets entered the new year with extremely low spreads over benchmarks as a result of rising US Treasury yields and strong demand for EM paper from various groups of investors in 2H17. We do not consider this situation to be stable, and we expect the premiums to widen in the foreseeable future. The same thinking is prompting issuers to tap the market with new paper, and as a result, this January was the heaviest January on record for EM issuance.
> External factors to have a significant impact on sovereign issuance. This year, the Russian Finance Ministry is likely to again be one of the most active issuers on both the domestic and external bond markets. However, several external factors, including potential further sanctions from the US, could seriously impact the ministry's plans or even curtail its access to parts of the primary market. We do not expect any of these factors to damage the budget, but we think an understanding of them is of great importance for investors and for trading in the secondary market.
> Last year's main corporate story has reached a resolution. The legal dispute between Sistema and Rosneft came to a rather sudden denouement in the final days of last year in the form of an out-of-court settlement. Arguably, leaving such a protracted conflict unresolved and consistently generating negative news flow would have been bad for investor sentiment, especially as it involved a large state-controlled company. Throughout the year, this story generated significant volatility in Sistema's Eurobonds, which dropped below 80% in December but are now back to non-distressed levels. We examined the structure of the R100 bln in compensation that Sistema owes Bashneft and the impact it will have on the companies involved.
> CIS corporate issues in demand. So far this year, aside from the burgeoning pipeline of primary Eurobond placements, the Russian corporate universe has produced relatively little news flow for bond investors. However, we have seen a number of interesting headlines related to NC KazMunaiGas and Socar, the Kazakh and Azeri oil and gas companies under our coverage. Although Socar's spreads over Gazprom and NC KMG are at historical lows, it could be argued that the stronger than expected oil price recovery and positive company-specific headlines provide further modest upside against a backdrop of what is still a positive market environment for the company.
> Be aware of duration. Given the strong probability that US Treasury yields have further to climb, we would recommend avoiding positioning in bonds with high duration. Our top picks are concentrated in the middle of the curve. For risk-tolerant investors, we recommend gaining exposure to certain CIS names with decent credit quality.