Fixed Income Quarterly. October 2017 - Golden Autumn

> Time to get the crops in the sheds. Returns have been abundant this year, and many investors may now be content to harvest the fruits of their labor and enjoy a tranquil autumn rather than adopt new strategies. We expect the market to remain relatively stable over 4Q17. Potential primary supply will likely be absorbed by EM fund inflows, with demand coming from investors traditionally focused on developed markets. In general, we recommend maintaining positions in bonds with moderate credit risk and duration.
> CIS sovereign issuers abuzz with activity in recent months. The list of sovereigns tapping the market recently includes Russia, Ukraine, Belarus, Azerbaijan and Tajikistan. This has presented investors with a wide range of opportunities. The bonds of Ukraine and Tajikistan would suit a rather speculative positioning, while the Russian paper would be a good choice for those seeking a safer asset to switch into toward year end. Meanwhile, Belarus continues to be one of our top picks for a buy-and-hold strategy, whereas we are rather cautious on the outlook for Azerbaijan.
> Takeover of Otkritie FC Bank and B&N Bank had limited impact on banking sector but will restrict primary market access for other private banks. The resolution mechanism applied to the banks envisages both continuing as going concerns. No payment moratorium is being applied, and the CBR has stipulated that the banks' senior creditors will not be bailed in. Meanwhile, the failure of the two large private banks and negative publicity in the local press has caused a flight to quality in deposits. Further volatility of deposits is possible in the upcoming months. Eventually, this will likely result in funding costs increasing for private banks. On the Eurobond market, it appears that Russian private banks will have only limited access to the primary market until the dust settles. Secondary markets may exhibit higher sensitivity to news flow and could be volatile.
> Polyus Eurobonds offer interesting opportunity. With Russian corporate bond spreads tight, we think it is worth looking at the bonds of companies with decent fundamentals that, for whatever reason, still offer some yield pickup. We see Polyus notes as a good example of this. Polyus has been known to the market for quite a long time, but has had certain operational setbacks and shareholder-related issues, which have amplified the risks and called for additional compensation. We believe that most of these risks have now either diminished or even been completely eradicated. We revisit Polyus's story, outlining key points of the company's production and financial profiles, and we take a look at the recent changes to the shareholding structure and corporate governance.