Fixed Income - Sizing up the Swings in Belarusian Sovereigns

In this report, we summarize the backdrop for the recent price action in Belarusian bonds. We think that volatility in the Eurobonds could remain elevated in the upcoming weeks as investors weigh the prospects of new US/EU sanctions. That said, we note that the spreads on Belarusian bonds to Russian and Ukrainian paper approached their highest levels since August-November 2020 (500 bps and 170 bps, respectively). > Belarusian bonds were hit by sanctions headlines during the week starting May 24. At the trough of the correction, prices dipped by as much as 2.6-4.0 pp depending on maturity. In yield terms, the curve widened 75-130 bps. Closer to the weekend some local bids appeared at these levels, despite the sanction noise, and the selling temporarily eased. The bonds continued recovering this week and are down 20-40 bps in yield from last week's peak levels. > Currently, Belarusian Z-spreads are holding near 600-650 bps, versus the average levels of around 300 bps during relatively quiet periods such as 2017-19. However, the current Z-spreads are still below the levels seen in March 2020, at the peak of the Covid pandemic-related selloff, when they reached 700 bps, and the post-August election peak of 750 bps amid a double shock of domestic instability and a shortage of financing sources for debt payments. > Belarus has also heavily underperformed regional peers. The average spreads to Russia and Ukraine have reached 500 bps and 170 bps, the highest levels for each since August-November 2020. The respective three-year averages are 300 bps and -50 bps. > The curve has substantially flattened, with the spread between the Belarus 30 and Belarus 23 narrowing from 80 bps to around 30 bps, the lowest level since November 2020. A similar curve-flattening pattern took hold last August, a time when the Belarus 23 was trading as much as 150 bps below the Belarus 30. > Belarus's ruble-denominated bonds that trade on the Moscow Exchange have also come under pressure. The 1y Belarus 3/4 (August 2022) increased 70 bps to 8.50%, the highest level since January 2021. The spread to OFZs moved from 180 bps to 250 bps, the highest point since this past March.