Russian Fixed Income Daily
- Level to start bids for OFZ 25057 today - 7.49%
- Our target for Baltika\'07 is set at 8.5%

FX and money market
Yesterday, the rouble lost some 6 kopecks sliding to RBL/US$28.7345 (tom) following a drop in the euro. As the CBR is keeping the rouble exchange rate strongly correlated to the euro, today we expect the rouble to appreciate and forecast it in the range of RBL/US$28.65-28.7. As expected, in the money market interbank rates increased to 5-5.5% due to large tax payments to be made today. We do not expect any significant improvements in liquidity in the next few days due to further scheduled tax payments and the end-of-month effect. The relatively expensive rouble in the money market is supportive for the currency in the FX market.

Julia Tsepliaeva, Moscow (7 095) 755 5489

Rouble bond market
On Tuesday, trading activity returned to average after a very slow Monday. At the same time, it was the first time this month that prices in the corporate sector actually fell simultaneously in the majority of liquidly traded bonds. This fall was not large, but, as we said, took place on the back of rising turnover. On the other hand, nothing similar happened in the municipal sector, where prices of long bonds marginally rose.

Meanwhile, money market conditions have been gradually deteriorating: 1-day MIBOR is currently at 3.7%, but this morning overnight interbank rates were at 6-7%. The primary reason for this is the many times mentioned tax payments (VAT) amounting to RBL130-140bn. This is not the end of the story: on July 25, Russian companies will pay the natural resource tax and the excise duties, and on July 28, the profit tax.

At the same time, US Treasuries interrupted the constant fall that they have exhibited since the end of June. Yesterday, US10Y tested a yield level of 4.23% upwards, but failed to cross it and later retreated to 4.18%, which was significantly lower than the opening point (4.21%). This did not prevent Russian Eurobonds from falling, however, as traders allowed the sovereign spread to widen several bps and as a result Russia\'30 fell in value from 111 to 110.5. This in itself is not a big deal, but now the main benchmark is significantly off the recent tops located above 112. Russia\'30-US10Y\'s spread is now at 149bp.

Government bonds
The main event here today is the CBR\'s auction of an additional RBL16bn tranche of OFZ 25057. At the moment, the paper is yielding 7.42% to maturity in 5 years, so we believe it reasonable to start placing bets for it from 7.49% and upwards. 7.49% YTM on the auction date will correspond to a price of 100.41. The tactics are standard: buy the bond at the auction and cash profits in a day or two. Profit to be expected: about 30bp.

Corporate bonds
Price changes for corporate benchmarks in secondary trading: Gazprom-3 +4bp, Lukoil +7bp, RZhD-3 -11bp, FSK UES -12bp. Second-tier bonds: Pyaterochka -20bp, TMK-2 +15bp, CenTel-4 +0bp. As can be seen, price action was more negative in first-tier issues, while bonds with lower credit displayed no clear tendency.

Baltika bonds have been undeservedly forgotten by investors and currently look significantly undervalued on a relative value basis. Right now, Baltika is yielding 8.93% to maturity trading in line with UrSI-4 while being significantly better in credit quality. In our opinion, Baltika\'s fair YTM level is below 8.5%, which promises a price upside of 70bp.

Other corporate bonds currently looking attractive from a relative value standpoint: Pyaterochka (YTM target 9.75%), CenTel-4 (YTM target 10%), Megafon-3 (YTM target 8.5%), TMK-2 (YTP target 9%), Salavat-2, FSK UES, Lukoil.

Short term market view
The situation on the domestic bond market is worsening slightly, as we anticipated based on our rouble liquidity level forecasts. We expect adverse money market conditions to last throughout the rest of July, and also cannot exclude the possibility of a further fall in US Treasuries to 4.5% in US10Y. These factors are likely to continue to generate price falls in long rouble bonds that are advised to be used for purchases. Our general recommendation remains a Hold in expectation of further market weakening, but we are considering changing it to a Buy at around July 25.

Dmitry Dudkin, Moscow (7 095) 755 5480

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