Russian Fixed Income Daily
- Russia\'30 touches 115, trades at 123bp over US10Y
- Moscow-39 reaches target 7.6%, the latter moves to 7.35%
- General view: short-term positive...

FX and money market

On Friday the rouble significantly appreciated to RBL/US$28.29 gaining 16 kopecks (sometimes during the trade session it even reached RBL/US$28.23) which is three-month low. The main reason of strong upward pressure on the rouble was the deep dollar’s drop against the euro to US$/EUR1.254. In addition, scheduled for Friday US changes in non-farm payrolls were lower than market expectations and as a result, did not support the dollar. Currently, uncertainty regarding euro/dollar trend makes Russian FX market rather frail and today we expect to see the rouble in the range of RBL/US$28.20-28.25. Money market interest rates reached their “normal” level while bank’s balances in correspondent accounts at the Russian central bank fell to RBL304.8 bn today from RBL306.4bn on Friday.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market

On Friday the rouble bond market finally managed to get over the consequences of the latest liquidity squeeze and demonstrate significant growth, which was evident in all three market sectors.

The primary growth driver was, however, a surprise to us: insignificant OFZ auctions for placement of remaining parts of old OFZ tranches again, as in the case with several latest OFZ placements, produced a rally in long OFZs, which, in turn, induced strong buying in non-government market sectors.

US Treasuries, on the other hand, did not respond on Friday to the US payrolls data, which turned out to be rather ballpark. Right now, US10Y is at 4.03% - very close to where it was on Friday morning. In spite of that, Russia’30 again made a step up and was trading as high as 115, which reduced its spread over US10Y to 123bp – another all-time low. It is pretty obvious that the upside of Russia’30 is waning, but we believe it is still present: further spread compression potential is looking doubtful, but US10Y can reach level 3.9%, which should take Russia’30 as high as 116. In the medium-term perspective, Russia’30 is expected to fluctuate in the range of 111-116.

Government bonds

As we already mentioned, Friday growth of the entire market was provoked by the rally in long OFZs that followed the publication of results of several small OFZ auctions. The sizes offered to the public were: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. The placement volume for OFZ 46017 (11 years to maturity) was the highest, so the main events were happening in this paper. On Thursday the bond was trading at 7.42%, but after the auction the yield turned put to be 7.23%, which corresponded in price to a growth of 132bp.

This upward jump produced a parallel shift in other long government bonds, among which naturally the most notable was the longest OFZ 46018 (16 years to maturity), which gained 240bp reducing its yield to 7.28%.

As a result, the yield curve is practically flat now at the long end, the latter residing at 7.2%. In our previous updates we already stated that the current situation in the government sector does not allow for predictions with a reasonable degree of certainty. Only one thing is more or less clear: in the nearest future long government bonds should not significantly correct downwards, but how far they can grow further – is very hard to determine. Being unable to set clear goals for long OFZs now, we do not recommend market participants to continue playing speculative games with these papers.

Municipal bonds

Due to the rally in long OFZs, long Moscow bonds were on Friday also moving higher. Specifically, Moscow-39 grew 68bp reducing its YTM to 7.54%; Moscow-38 jumped up 46bp reaching YTM 7.3%; Moscow-36 gained 47bp, etc...

Having demonstrated such growth, Moscow-39 (the longest bond on the curve, 9 years to maturity) finally surpassed our target set for it at 7.6%. On the other hand, the spread of Moscow-39 to the OFZ curve increased from 37 to 43bp due to forward growth in OFZ 46014. Therefore, we maintain our buy recommendation for Moscow-39 and simply relocate our target for its YTM to 7.35.

Among non-Moscow bonds several shorter issues now appear cheap, as traders temporarily lost interest in them. We specifically would like to mention YaroslavlReg-2 (8.2% for 2 years) and MosReg-3 (6.9% for 2 years).

Corporate sector

Price changes of corporate benchmarks in secondary trading: Gazprom-4 +28bp, Lukoil +30bp, RZhD-3 -2bp, FSK UES +48bp. Second-tier bonds: Megafon-3 -3bp, Salavat-2 +37bp, UrSI-4 +16bp, CenTel-4 +24bp, ChTPZ +16bp.

Lukoil grew 30bp on Friday reducing its yield to put in 2 years to 6.54%, which now appears very low compared to its peers bond RZhD-2 (6.74% for roughly the same term). The only explanation for that is the shift in pricing of Lukoil from put option to maturity, to which the bond is now yielding 6.91%. This looks in line with such high-grade bonds, as Gazprom-4 and RZhD-3 (both yielding close to 7%), but is again not cheap. Further upside of Lukoil is possible only with general market growth.

As indicated, Salavat-2 grew on Friday 37bp and is now approaching our YTM goal 8.6% now yielding 8.64% for 4 years. We maintain our buy recommendation for the bond, but would like to warn that profit-taking in it is approaching.

Also, ChTPZ, previously recommended by us for buying, gained 16bp on Friday having descended in yield to 8.57% to maturity in 3 years. Out target for the bond is set at 8.4% and we expect it to be reached in the nearest future.

RusAl-2 still offers a very good buying opportunity: the bond is now at 7.69% to maturity in 20 months and it was unaffected by Friday’s rally. Our target for it was previously located at 7.5%, and we maintain a Buy recommendation for this paper.

Among high-grade bonds, only Gazprom-3 appears to be significantly undervalued. The paper is yielding 6.44% to maturity in 1.5 years, while it can easily trade as low as 6%, where TNK-5 currently is. This constitutes a price upside of at least 50bp.

Short term market view

We believe that Friday’s growth was not the end of the broader upward movement, but just an active start of it. Until mid-September, the financial system should not see any rouble liquidity deficit, while Russian Eurobonds are expected to remain strong. Our general recommendation regarding long rouble bonds remains a Buy.

Dmitry Dudkin, Moscow (7 095) 755 5480