Fixed Income Quarterly. July 2017 - Still Waters

> Global market paradox remains in place. The Fed has hiked rates by 100 bps since December 2015, and the market expects at least another 75 bps of hikes over the next 18 months. Meanwhile, the 10y US Treasury yield remains very close to the end-2015 level. Yield growth potential is in place, in our view, and we would not rule out some signs of this starting to materialize in 2H17. This could have a negative influence on both the primary and secondary markets.
> Russian "new-style" sovereigns are relatively cheap. The Finance Ministry successfully placed $3 bln worth of Eurobonds in June. We also expect the government to swap some existing bonds for new ones (up to $4 bln of them) later this year. All the Eurobonds placed since 2016 have been issued in the "new style" and trade with a 10-30 bp premium over the "old-style" bonds despite there being no material difference between them. We expect the market perception of the new-style bonds to gradually improve and the premium to eventually disappear. Hence, we see additional value in the new-style papers.
> Foreign demand for OFZs beginning to wane. We do not see much scope for OFZ yield tightening, so the market should become less attractive for hedge funds, though still-high real rates and the rising share of Russian local debt in global indexes should preserve demand among real money accounts, albeit at a lower level. We expect foreigners to pass the baton to local banks by year end without a significant impact on yields. Ruble liquidity in the banking system will resume growing in 4Q17 amid tightening liquidity coverage regulation and traditional year-end budget spending. The latter may increase demand for OFZs from domestic banks.
> VEON (formerly VimpelCom) terminates guarantees from its core Russian operating unit, OJSC VimpelCom, for three of its Eurobonds. We examine the reasons behind the move as well as differences between the various VimpelCom Eurobonds still outstanding.
> Sistema faces another round of legal proceedings over Bashneft. This has been the main corporate story in recent months. It came right out of the blue, as the claims stemming from Sistema's ownership of Bashneft were seemingly resolved several years ago, and Sistema was not even party to the deal the last time Bashneft changed hands. We take a brief look at how the story has evolved to date and assess the potential outcomes.
> Kazakh independent oil and gas producer Nostrum Oil completes new Eurobond placement. We find the issuer's credit profile quite interesting: the company's assets are relatively straightforward, but Nostrum Oil has fairly aggressive capital allocation policies and a complicated ownership structure deeply rooted in various aspects of Kazakhstan's economic history.