Russian Fixed Income Daily
- US10Y finds yield support at 4.38%
- OFZ placements today: indicators of true demand
- View for December - positive...

FX and money market

Yesterday on the back of the end-of-month effect, conditions in the money market tightened with interbank overnight interest rates spiking up to 12-13%, although close to the evening rates dropped to 6-7%. The liquidity squeeze on the money market is expected to improve in December with the accumulation of roubles and deferred MoF budget expenditures being made on a cash basis. For the FX side, compared to Monday the rouble yesterday gained 13 kopecks appreciating to RBL/USD28.73 (tom) due to the euro’s growth against the dollar. Tomorrow’s scheduled ECB meeting regarding the refinancing rate, which the market expects to rise by quarter to 2.25%, could affect the further mood of the euro/dollar trend. Today we see the rouble in the range of RBL/USD28.75-28.80.

Olga Golub, Moscow (7 095) 755 5176

Rouble bond market

On Tuesday the domestic bond market remained in a consolidation phase, being limited in growth by high money market rates. Trading activity was substantial, but the prices of long bonds on average marginally retreated downwards.

US Treasuries and Russia’30

If we look at the candle yield chart for US10Y on page MD1, it’s notable that the American benchmark found yield support at the 4.38% level, which is approximately equal to the local low previously seen on 21 October. In intraday trading a jump up in yield yesterday was connected with the publication of American economic data, which unanimously demonstrated that the US economy is on the right track: durable goods orders, the consumer confidence index, and new home sales turned out to be significantly above expectations. As a result, US10Y is now trading at 4.46% versus 4.4% yesterday morning.

We believe that this move defines the range for US10Y in the nearest future to be 4.38-4.68%, where 4.68% is the recent yield top seen on 4 November, as well as 23 March 2005.

Unfortunately, this does not promise Russia’30 anything good: as US10Y is currently located close to the bottom of its yield range, the only thing that can save Russia’30 from falling is spread compression. The possibility of this happening is very limited now, as the current value of the Russia’30-US10Y spread is 106bp (again, look at the spread chart on at page MD1), very close to the historical minimum 94bp seen on 29 September and which later triggered a large sell-off of Russian Eurobonds.

As a result, we believe that the medium-term perspective for external bond markets still lies in the area of yield growth, but the worst-case scenario (a break of US10Y above the recent yield top 4.68%) is more likely to materialise after the 13 December FOMC meeting if the Fed, in the accompanying statement, remains at least as hawkish as it was previously. On the other hand, if the statement suggests that the target rate will not be raised at the next meeting on 21 January, the range 4.38-4.68% is very likely to remain the domain in which to expect US10Y for several more months.

Additional placements of OFZs

Today the CBR will conduct auctions to place additional, relatively small, tranches of OFZ 46017 (RBL4bn), OFZ 25057 (RBL3bn), and OFZ 25058 (RBL6bn).

We strongly advise market participants to take part in these auctions, which offer a good opportunity to obtain liquid papers at a premium over their fair value, as the placement is happening at a time of a strong liquidity squeeze.

OFZ 25058 (29 months to maturity, duration 2.1 years) is a paper for passively managed portfolios, which was yesterday trading at a YTM 6.25% (price 100.425). We believe that it is unlikely that MinFin will allow the CBR to sell the bond significantly cheaper than 6.35%, so we recommend bidding for the bond in the range of 100.2-100.325 (6.3-6.36%).

OFZ 25057 (5 years to maturity, duration 3.4 years) is located in the middle of the curve and provides a good trade-off between yield and interest-rate risk. Its current YTM is 6.59% (price 103.5). Again, it is unlikely that the yield at the auction will exceed 6.7% (price 103.1), so we recommend placing orders for the bond in the range of 103-103.27 (6.65-6.73%).

OFZ 46017 (11 years to maturity, duration 6.7 years) is one of the longest bonds on the curve, thus having a speculative character. The paper was yesterday trading at 6.91% (price 105.8). It is clear that the market will be pricing the paper today in the yield range of 6.9-7%, so we recommend placing orders for OFZ 46017 in the range of 6.95-7.05% (104.8-105.51).

Overall, today’s auctions are very interesting, as in the absence of regular supply of government bonds they will be very informative in revealing the true demand for new paper along the OFZ curve.

Short-term market view

Today the market is probably experiencing the last day of the current severe liquidity shortage. Starting from tomorrow and towards the year’s end, we should see a quick accumulation in the balances of correspondent accounts with the CBR, and consequently, a reduction of short-term rates. At the same time, we do not view the threat form the side of Russian Eurobonds as imminent, as this factor is more likely to become more important in the second half of this month. As a result, our view for December remains positive.

Dmitry Dudkin, Moscow (7 095) 755 5480