Russian Fixed Income Daily
- Reasonable bid level for OFZ 25058 - 7.04%
- NKNH-4 grew 1% yesterday: downgrade to Hold from Buy
- ST outlook - positive till August 15...

FX and money market
Yesterday, given negligible fluctuations of the euro/dollar exchange rate, the situation in the Russian FX market became rather calm with the rouble trading in the narrow range of RBL/US$28.57-28.59. The uncertainty of the EUR/US$, especially on the threshold of FOMC\'s decision on 9 August regarding its target rate and new US macroeconomic figures (unemployment rate and payrolls) due on 5 August, has been making the rouble volatile as the correlation between the local currency and the euro/dollar has strengthened. Today, we expect to see the rouble in the range of RBL/US$28.58-28.63.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market
On Tuesday, corporate bonds showed marginal growth, while the municipal and government sectors were more or less flat in price movement. Trading activity was a little below average level like Monday.

The money market is quickly returning to normal after a lack of liquidity at the end of July: now 1-day MIBOR is at 2.18%, which is not bad, considering that in recent months it has usually fluctuated somewhere between 1 and 2% when the money market was not disturbed by large liquidity drains.

US Treasuries did not change much on Tuesday with US10Y remaining at Monday\'s level of 4.33%. As we have already noted, we believe American bonds are now in a medium-term downward trend that should take US10Y to 4.5%. Although adverse, this factor will not be able to significantly influence the rouble bond market as the spread compression of emerging market external debt allows Russian Eurobonds to escape falling in such conditions. A break of US10Y above 4.5% is to be closely watched, as should Treasuries rise beyond this level, spread compression will not be able to prevent Eurobonds from reacting, which will trigger a sell-off on the rouble market as well. The main risk event for international bond markets this week is Friday\'s publication of July\'s job report in the US.

Government sector
Today the CBR is auctioning an additional RBL8bn tranche of OFZ 25058. The paper has been recently adjusting downwards, and yesterday was trading with a yield of 6.96% to maturity in 3 years. In the current market situation of significant paper deficit, it is unlikely that the government will offer a significant premium, but taking into account the relatively short duration of OFZ 25058 (2.4 years), such a premium should be demanded as otherwise there\'s no sense in taking part in this auction. Therefore, we believe it is reasonable to start placing bets for the bond at 7.04%, which at least promises a price upside of 20bp. Only if the bond is really needed as a long-term, passive investment, would it be reasonable to try buying it at 6.99-7%.

Corporate sector
Price changes of corporate benchmarks in secondary trading: Gazprom-4 +2bp, Lukoil -7bp, RZhD-3 +10bp, FSK UES +5bp. Second-tier bonds: NKNH-4 +100bp, Salavat-2 -6bp, CenTel-4 +6bp. Overall, sentiment in the sector was positive and it was clear that traders were basically looking for what else to buy, having less desire for such popular bonds as Salavat-2 that have already grown significantly lately.

It is not clear whether we should be blamed for this, but NKNH-4 that was on our buy list two days ago, basically exploded yesterday jumping up one figure. As a result, its YTP dropped to 9.12%, which is very close to our target 9.1%. Taking this into account, we are changing our recommendation for NKNH-4 to a Hold, as having gained momentum, the bond could grow further in a short-term perspective.

Other corporate bonds currently looking attractive from a relative value standpoint: Baltika (YTM target 8.25%), Megafon-3 (YTM target 8.5%), FSK UES (YTM target 7.25%).

Short term market view
The rouble bond market is gradually growing, so having taken an appropriate position, it would be wise to simply wait and watch it grow further. By an appropriate position, we mean increased portfolio duration, which does not appear to significantly increase risk, but definitely increases capital gains. We see interest rate risk exposure as limited now, as market participants are displaying an obvious appetite for longer bonds having shown no intention to sell them, even in recent periods of high money-market rates. Our general recommendation regarding long bonds remains a Hold after having been changed from a Buy.

Dmitry Dudkin, Moscow (7 095) 755 5480