Fixed Income Daily: The market remained in an uptrend against the background of more lively trading yesterday

EXTERNAL DEBT MARKET
The market received a new portion of mixed US economic data yesterday,
which drove an already high UST volatility even higher. US GDP growth in
1Q05 was the lowest over the last two years, considerably below
expectations at 3.1% vs. 3.5% anticipated. Against this background,
personal consumption growth exceeded expectations by 0.3%, and GDP
deflator was 3.2%, 1.1% higher than expected. The data has once again
questioned sustainability of the US economy uptrend, if has not suggested
a slowdown. In such circumstances, expectations of more aggressive rate
increases by the US Fed are weakening, as investors are inclined to
believe that the Fed will likely be hiking the rate at a “measured” pace, by
25 bp.
As a result, the yield of the 10Y UST, which was 4.20-4.22% ahead of the
data publication, closed at 4.14% in New York. The market is waiting for a
new portion of US economic data today; the yield of the 10Y UST has risen
to 4.17-4.18%.
Faster UST yield decreases caused the EMBI+ index spread to widen by
11 bp to 400 bp yesterday, while the Russian spread widened by 4 bp to
194 bp.
The Russia-30, traded at 106.2-106.4% over the first half of the day, closed
at 106.25% in Moscow, at a spread of 198 bp over UST. This morning, the
Russia-30 is traded at 106.100-106.300, while its spread is 200-203 bp.
Among Russian corporate Eurobonds, the Gazprom enjoyed healthy
demand yesterday, while trading activity in other issues was minimal..
We recommend buying the Russia-30 at a spread over 200 bp. In our
opinion, the spread is likely to narrow to 170-180 bp as soon as by mid-
May 2005 in case an official agreement is achieved between Russia and
the Paris Club, which, from our point of view, is highly probable.
Our recommendation remains unchanged: stay long Russian Sovereign
Eurobonds.
LOCAL DEBT MARKET
The market remained in an uptrend against the background of more lively
trading yesterday. Most issues added up to 0.1-0.3% on high volumes, with
most demand concentrated in the first tier. Price growth is likely to continue
today.
In the government bond sector, rather active trading was observed in longdated
issues, which inched up some 0.1%. The leader was the OFZ 46014,
whose yield fell to 8.01%. The yield curve of long-dated issues decreased
by 1-2 bp to 7.5-8.79%.
Although there was more turnover in Moscow municipals yesterday, trading
in the sector remains thin, with prices mixed. The leader in turnover was
the Moscow-32, which inched down.
In sub-Sovereigns, the market leaders remain the Moscow Region bonds,
which added another 0.1-0.2% yesterday. The yield of the Moscow Region-
4 and -5 lost another 3-8 bp, to 8.69% and 8.77% YTM respectively.
In corporate bonds, most demand was concentrated in long-maturity firsttier
issues, which rose by 0.1-0.5%. The most active dealing was noted in
the Gazprom, Lukoil and FSK. Price increases prevailed in the second tier
on average trading volumes.
The most important event in the market today will be a new Sibirtelecom
issue placement, expected to be successful for the issuer. The yield at the
auction is unlikely to exceed 9.4% annualized.