Russian Fixed Income Daily
- Small OFZ auctions today
- Russian Standard upgraded 1 notch to Ba2
- Shorter Gazprom issues finally started growing...

FX and money market

On Thursday, the rouble continued to appreciate as a result of the euro’s strength against the dollar to US$/EUR1.243 and by the end of trade it reached RBL/US$28.405. Currently, market players seem to be lacking decisive trading ideas and are probably taking a ‘wait-and-see’ attitude on the back of the unclear euro/dollar trend. Scheduled for today, US changes in non-farm payrolls could strongly influence the dollar’s performance which will consequently have an effect on the rouble. Just now the rouble is trading at RBL/US$28.30 and we expect to see it today in the range of RBL/US$28.29-28.35.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market

Thursday turned out to be a more positive day than previous days this week: trading activity was quite significant, especially in the corporate sector, while prices were growing. Appreciation was more evident yesterday both in the government and corporate sectors, while municipal papers appreciated only marginally.

The money market conditions finally demonstrated significant improvement after the liquidity squeeze at the end of August. 1-day MIBOR descended over the course of yesterday from 4.74 to 2.61% - still higher than the ‘normal’ level, but already low enough to foster demand for rouble debt.

Also, Russia’30 reached another all-time high: level 114.5 was achieved by it in the middle of the day on US10Y testing level 4%. The latter went as low as 3.98% in yield, but in subsequent trading erased these gains and is now located at 4.02% - very close to yesterday’s opening point. Our view for US Treasuries remains short-term positive: we believe US10Y is able to reach level 3.9% in the nearest future taking Russia’30 to 115.5.

Government bonds

For the first time this week long OFZs demonstrated notable growth yesterday, which was especially notable in OFZ 46017. The paper gained 62bp in price reaching YTM level 7.42%. We believe this agitation was a simple result of today’s placement of remaining parts of several OFZ tranches: market participants probably expected the auction to produce another rally and were buying long bonds in anticipation of it.

On the other hand, we do not believe this rally has to happen: long OFZs are already looking quite expensive, so the placement may not significantly affect their pricing. In addition, the offering sizes are so small that many investors may simply choose to skip this auction having no hope of buying a significant volume there. We simply want to remind them that the offered sizes are: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. These figures are so small in comparison to regular OFZ auctions, that we don’t expect anything significant to happen to the market due to these placements.

Corporate sector

The LT credit rating of the Russian Standard bank was yesterday upgraded by Moody’s to Ba2 from Ba3. This event raised some interest for outstanding RSB bonds, among which the most interesting now are RusStand-3 (8.04% for 1 year) and RusStand-4 (also about 8% for 6 months). Market participants should not be mislead by the current price of RusStand-3 (104.9), as the bond still costs something like 100.5, but this high weighted average price yesterday resulted from an unfortunate buyer mistakenly taking an offer for RBL15mln at 110.5, which was purposely put at this level in a hope of such a mistake.

Price changes of corporate benchmarks in secondary trading: Gazprom-4 +10bp, Lukoil +17bp, RZhD-3 +33bp, FSK UES -1bp. Second-tier bonds: Baltika +12bp, Salavat-2 +66bp, UrSI-4 +2bp, CenTel-4 +42bp, ChTPZ +4bp.

Continuing growth of CenTel-4, which is currently yielding 8.61% to maturity in 4 years, supports our view that its peer bond Pyaterochka should trade at the least at 8.75%, as the latter is better than CenterTelecom from a credit point of view. We maintain a Buy recommendation for Pyaterochka.

Salavat-2 gained 66bp yesterday, reducing its YTM to 8.75% for 4 years. Our target level for the bond is currently located at 8.6%, which still promises a price upside of 35-40bp. We maintain a Buy recommendation for Salavat-2.

Finally, relatively short Gazprom bonds moved up a bit: Gazprom-3 gained 8bp, now yielding 6.44% to maturity in 16 months, while Gazprom-5 grew 17bp, reaching YTM 6.65% (for 2 years). Both bonds are currently recommended by us for buying with targets 6.25 and 6.5% accordingly.

Recent growth of OMK bonds, that are now yielding 8.12% for 3 years, promises significant upside for one of our top picks ChTPZ. The latter is now trading at 8.64% and we believe that the spread of 50bp over OMK is ungrounded. Out target for ChTPZ is now located at 8.4%.

Short term market view

The short-term outlook appears quite positive: Russian Eurobonds are stronger than ever, cost of rouble funding should remain contained until mid-September. In such conditions increased portfolio duration should help capture better the capital gains, so our general Buy recommendation for long rouble bonds remains active.

Dmitry Dudkin, Moscow (7 095) 755 5480

MoF on fiscal softening

The Finance Minister Kudrin asked the investment community to support his position to prevent further softening of fiscal policy

Yesterday, Finance Minister Alexei Kudrin began the active campaign against further softening of fiscal policy: he met with representatives of investment banks and express his views in Rossiyskay gazeta. He said that all MinFin’s effort to make 2006 budget rather conservative failed and budget expenditures were gradually increased by RBL568bn (US$20bn) over the initial MinFin’s plan while attacks on the stabilisation fund to spend this money on investment projects or increase in social expenditures strongly intensified.

Fiscal policy softening is not a new phenomenon for Russia. In 2005, budget expenditures were additionally increased by RBL385bn. Yukos tax payments and high oil prices resulted in dramatic spike in budget revenues in 2005, making temptation to increase non-interest expenditures too strong for politicians, despite certain inflationary consequences of this decision. Although we fully share the minister’s position on the issue, Russia is very unlikely to tighten its fiscal policy in the coming years as oil revenues are likely to remain high.

From political point of view, we believe Kudrin’s attempt to make the policy tougher is very important. Despite the fact that Kudrin remained the only consequent activist of a conservative fiscal approach and further promotion of structural reforms in the government, he is not alone as the investment community generally shares his views. The call for the investment community’s support may play a crucial role in reduction of expenditure appetite of the government.

Investment implications: We welcome The MoF intention to fight against further fiscal softening. The investment community support may be crucial for keeping the fiscal approach more conservative.

Julia Tsepliaeva, Moscow (7 095) 755 5489