Russian Fixed Income Daily
- Improvement in money market conditions expected
- Mid-term OFZs appear attractive
- KrVostok, TMK-1 and -2, Mechel-SG added to Buy list...

FX and money market

On the back of the end-of-month effect, the money market on Monday faced spiking overnight interest rates up to 10-12%. Shortage of rouble liquidity stirred dollar sales, although these were not so massive. At the same time, this illiquidity in the market did not put any upward pressure on the rouble as the euro’s depreciation against the dollar had a stronger impact on the local currency, pushing it down to RBL/USD28.55. With the beginning of the new month and no tax bills to be paid, we expect that conditions should gradually improve and overnight interest rates to drop back to their usual low level. Today we see the rouble in the range of RBL/USD28.55-28.60, continuing to be linked to the bi-currency basket.

On the threshold of today’s FOMC meeting, the FX market will be more or less cautious. Participants are expecting a further increase of the benchmark interest rate to 4%.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market

On Monday, trading on the local bond market was very slow with prices stuck in consolidation phase after a significant retreat in the middle of October.

Today the money market is expected to feel some relief after a strong liquidity squeeze at the end of last month. The balance in correspondent accounts has already jumped up to over RBL300bn, indicating that short-term rates should drop today from the highs seen in recent days. This, in turn, will foster demand for long rouble bonds and support their prices in the short term.

International markets are expected to move cautiously today in anticipation of the FOMC decision which will be announced this evening. A lot may depend on the Fed’s comments that will accompany the action: although the market consensus is that the target rate will be raised from 3.75 to 4%, it is important to know when the Fed will interrupt the rate hikes, as today’s one (if it happens) will be the twelfth in a row.

Government bonds

Overall, the government sector did not move much yesterday on weak trading activity, although there were some notable events.

Specifically, market participants continued to lift the price of the longest bond on the curve, OFZ 46018, which shifted up 62bp yesterday, reducing its YTM to 6.95%. On the other hand, shorter bonds, such as OFZ 46014 and 46017 were more or less unchanged from Friday’s levels, and as a result, the OFZ yield curve now appears to slope downwards at the long end.

We believe that such a situation creates favourable buying opportunities for medium-term OFZs located at the hump of the curve: OFZ 25057 (YTM 6.82%, duration 3.4 years) and 46002 (YTM 7.06%, duration 4.5 years).

Municipal bonds

Price changes of the most popular papers in secondary trading: Moscow-39 -36bp, MosReg-5 +0bp, KrasnoyarskReg-3 +3bp.

As for the most attractive investment opportunities, we believe that the Moscow Region bonds provide very good value now, as their spread to the OFZ (and correspondingly, Moscow) curve has significantly widened. Both MosReg-4 and MosReg-5 now have durations of 3 years and are trading close to 7.25%. Their spread to the OFZ curve is now around 70bp, while in the first days of October it situated in the range of 30-40bp. Taking into account that MosReg-5 is one of the most liquid bonds on the market, we believe that the plusses of buying this bond outweigh the risks associated with holding a relatively long instrument.

Corporate sector

Price changes of high-grade corporate bonds in secondary trading: Gazprom-4 -17bp, Lukoil +2bp, RZhD-3 +0bp, FSK UES-2 -4bp. Second-tier issues: NKNH-4 +23bp, Pyaterochka +74bp, Salavat-2 -27bp, UrSI-5 -25bp, CenTel-4 -1bp.

As a result of the strong selling last week, some second-tier issues now appear quite attractive.

Specifically, ChTPZ, a 3-year bond of the Chelyabinsky Tube Rolling plant, is now trading with a spread of 234bp over the OFZ curve, while in September its spread was below 210bp. The issue now has a YTM of 8.78%, paying a premium of 50bp to its competitor OMK-1. We believe that both the wide spreads to OFZ and OMK-1 are not grounded from a credit point of view, so accumulation of ChTPZ with a target YTM 8.5% appears reasonable.

Among shorter issues interesting for more passive investment, we can recommend KrVostok (9% to maturity in 16 months), TMK-2 (8.27% to put in 17 months), TMK-1 (8.26% to maturity in 12 months), and Mechael-SG (8.1% to put in 7 months. All of these bonds are trading 15-20bp higher in yield than they should be, and all have reasonable credit quality to be recommended to be kept to maturity in case they do not appreciate in price.

Short term market view

As we mentioned in our previous update, the most reasonable forecast that can be made analysing the current state of US Treasuries, Russian Eurobonds, and long-term rouble rates in interaction is that the local debt market is likely to continue to move sideways throughout November. On the other hand, some inflow of fresh rouble liquidity expected to start from today could modestly lift the prices of rouble bonds. As a result, our general recommendation regarding long bonds remains a Hold.

Dmitry Dudkin, Moscow (7 095) 755 5480