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. Last Updated: 07/27/2016

Russia Reaps Benefit of Repayment

LONDON -- The cost of credit protection on Russian sovereign debt fell Tuesday on news that the government's debt agent, Vneshekonombank, had repaid the country's debut Eurobond, traders said.

Five-year default swaps on Russia were quoted 15 to 20 basis points lower at a bid/offer of 610/660 bps on Tuesday, after a week of falling, in expectation of the repayment of the $1.05 billion bond.

Default swaps, the most liquid type of credit derivative, are insurance-type tools that allow investors to hedge or gain the risk of an issuer defaulting on a loan or bond. The buyer pays the protection seller an annual premium, measured in bps.

Three-year default swaps on Russian debt were quoted at 610/660 bps, 15 bps lower than Monday's levels. Traders said the redemption of the Eurobond left investors chasing exposure to Russia credit risk.

"The short end [of the default swap curve] has been tightening hard because a lot of Russian money has been chasing short-dated Russian assets," said one trader with a European bank.

A dealer with a U.S. bank added that Russian default swaps could fall further in the near term if a deal was concluded with OPEC on significant cuts to oil output.

The cost of credit protection on Japan continued to rise Tuesday, following Monday's comment from a senior official with Standard & Poor's that a two-notch downgrade of the country's credit rating was possible.