Russian Fixed Income Daily
- Rally in OFZs: targets for 46014,17,18 revised downwards
- Long end of Moscow curve is looking attractive
- FSK UES downgraded to Sell...

Rouble bond market

A very successful placement of Gazprom-6 produced a rally on the market yesterday; therefore the day was quite strong in all market sectors. Correspondingly, trading activity was also very impressive, both in high-grade, second-tier and junk bonds.

Additional support was provided yesterday for the local market from the side of Russian Eurobonds that were moving up with a more or less constant spread to growing Treasuries. US10Y significantly corrected upwards on relatively weak US retail sales data and is now trading at 4.31 vs. 4.4% Thursday morning.

Government bonds

The main events were again happening yesterday at the long end of the OFZ curve: OFZ 46018 gained 53bp in price and traded at 8.03% to maturity in 16 years – very close to yield support 8% outlined by us in prior updates. OFZ 46014 and 46017 were adjusting their positions accordingly having grown 60 and 74bp.

On the other hand, current shape of the yield curve suggests there’s more room for growth of the papers mentioned above. Specifically, OFZ 46018 has a potential to descend in yield to 7.75%, OFZ 46017 – to 7.6%, OFZ 46014 – to 7.5%. With this in mind, we maintain a Hold recommendation regarding these bonds.

We also would like to mention that after recent growth intermediate-term OFZs recommended by us, namely OFZ 25058 and 46001 ceased looking cheap, so this is the right moment to fix profits in them, if they are not needed as passive, long-term investments.

Municipal bonds

Due to the rally on the long end of the OFZ curve, Moscow yield curve is currently looking increasingly attractive. Specifically, Moscow-39 (that grew 20bp yesterday) has a potential to extend its success and reach yield level 7.6% if our targets set for OFZs (see above) are hit. This constitutes further price upside for Moscow-39, which can be estimated at 230bp. We are downgrading Moscow-39 on performance from Buy to Hold, but recommend keeping it on position.

Accordingly, shorter bonds on the Moscow curve are also looking attractive: Moscow-38 and Moscow-41 appear having a similar potential of yield decline, but they definitely have lower trading liquidity, which makes Moscow-39 preferable.

Corporate bonds

Main event on the market yesterday was a placement of the sixth rouble issue of Gazprom (Baa3/BB-). At the auction, coupon rate for the 4-year bullet maturity bond was set at 6.95% - significantly below market consensus. Our recommended bid rate was 7.1%. As a result, Gazprom-6 is yielding 7.07% to maturity, which is looking unreasonably low compared to other high-grade issues and even Moscow curve.

Price changes of corporate benchmarks in secondary trading: Gazprom-5 +37bp, Lukoil +14bp, RZhD-3 +24bp, FSK UES +40bp. Second-tier bonds: Megafon-3 +8bp, NKNH-4 -41bp, Pyaterochka +0bp, Salavat-2 +20bp.

As indicated, FSK UES grew 40bp yesterday reaching our target YTM level 7.25%. We are downgrading the bond to Sell on this event as we believe it is time to take profit in long rouble bonds before adverse money market conditions start erasing results of the recent rally.

Short term market view

Today we are changing our general recommendation regarding long rouble bonds from Hold to Sell. We believe we helped investors capture the most of the August rally and now it is time to cash the profit in. We advise that market participants arrive to August 15 with reduced portfolio duration in order to limit interest risk exposure ahead of another period of higher short-term rates and, therefore, larger market uncertainty. This, however, does not preclude keeping on position such strategically attractive issues, as long OFZs and Moscow-39, which still have a very good growth potential.

Dmitry Dudkin, Moscow (7 095) 755 5480