Fixed Income Daily: There still are considerable shorts in the market of Russian Eurobonds opened by Russian players

EXTERNAL DEBT MARKET
The US payrolls published last Friday were much below expectations,
which surprised investors again, similar to the past two years. Only 78K
new jobs were reported in May 2005 (173K was expected), i.e. four times
less than in April and the lowest reading over two years. As a result, the
10Y UST yield plummeted from 3.90% to a new 1.5-year low of 3.80%
immediately after the data release.
However, the yield surged as sharply to 3.98% by the market close on
Friday on profit taking after a two-month UST rally.
Russian Eurobonds followed the base asset’s pattern. The Russia-30 hit a
new record high of 112.500 following the data release and then fell to
111.250 by the market close. Meanwhile, its spread remained record low at
168-170 bp. Today, the 10Y UST yield is near 3.95%, and the Russia-30 is
traded at 111.375, while its spread has narrowed to a new low of 165 bp.
There still are considerable shorts in the market of Russian Eurobonds
opened by Russian players. This should support the prices and limit the
downside in case of UST weakness. Meanwhile, the spread is likely to
continue narrowing towards 160 bp in the Russia-30.
Important for the UST market this week will be the Fed Chairman’s
testimony before the US Congress on June 9, where he is to discuss the
present condition of the economy and monetary and credit policy issues,
including interest rates. The market may receive new incentives from
Greenspan.

LOCAL DEBT MARKET
The ruble bond market, having been able to withstand a sharp fall of the
ruble over the last two weeks and reacting with only minor price decreases,
was all the more optimistic regarding a slight ruble increase to 28.37
RUB/USD on Friday, and ruble-denominated bonds added 0.1-0.2%. Still,
trading volumes are moderate, signaling that the summer season has
come.
It should be acknowledged that, at the present stage, a sharp ruble decline
has been completely compensated by huge ruble liquidity and, of course,
an unprecedented rally in Russian Eurobonds. As a result, the yields on
ruble bonds have remained near their lows. Nevertheless, there is hardly
any potential upside in the ruble bond market, since the yields are so low
that it is unclear what factors can drive them yet lower. The market will
most probably trade in a range of +/-50 bp yield over the next few months.