Russian Fixed Income Daily
- US10Y retains short-term downward bias
- Euro may reach 1.15 versus dollar by April
- We do not recommend increasing portfolio duration now...

• US10Y retains downside potential after a stormy Friday
• Euro may reach USD/EUR1.15 by April 2006 – bad for rouble debt
• We do not recommend increasing overall portfolio duration

Rouble bond market

Friday saw very limited price movement in all market sectors. Trading activity was at its average level for recent weeks and overall we can say that the market was stationary.

US10Y retains downward bias
During American trading on Friday, US10Y made several wild swings, including a very strong attempt to rise in price, which temporarily took its yield as low as 4.5% compared to 4.54% at the day’s opening. However, at this point significant selling pressure appeared which reversed market sentiment and in subsequent trading US10Y jumped up in yield to 4.59%.
So far, 4.6% remains the yield resistance for US10Y, but we believe that after Friday’s events the benchmark rate has a strong probability of crossing it upwards and attempting to break the previous yield high of 4.69%. If the latter event takes place, a strong tendency could develop that might be able to take US10Y to the 5% point and higher. Overall, our short-term outlook for US10Y remains negative.

Euro dynamics promises no good for the rouble debt
US trade balance figures released on Friday tuned out to be just a little bit worse than market expectations: in December the trade deficit widened to US$65.7bn versus the consensus US$65bn. On the release, the euro-dollar exchange rate made a large jump up to 1.2020 US$/euro, but similar to US10Y, failed to grow further and began retreating with growing speed. This downward momentum allowed the euro to cross the earlier unbreakable support band at 1.1930-50 US$/euro, and as a result, the single currency is now trading next to the 1.19 point.
We believe that the closing of the previous weeks at the 1.19 level signals a break of the upward sloping support line, which had been limiting the downside of the euro since November 2005. This is likely to cause the development of a medium-term downward move, which may take the euro to the 1.15 point already by April 2005. This, in turn, means that for this period the prospects of the rouble-dollar exchange rate will also be a downside for the rouble, and this is likely to cause a reduction in market demand for rouble debt instruments.

Short-term market view
The net demand clearly seen on the domestic bond market, fuelled by relatively cheap short-term funds, continues to support secondary trading. On the other hand, possible depreciation of the rouble as well as the anticipated negative dynamics of US Treasuries promise notable downward pressure for rouble bond prices. Overall, for the time being the market is likely to remain in consolidation, but later, in the second half of February when money market rates increase with tax payments, some price retreats are possible, especially in the longest papers. As a result, our current recommendation for long rouble bonds remains a Hold, and we do not recommend increasing the average portfolio duration.

Dmitry Dudkin, Moscow (7 095) 755 5480