Russian Fixed Income Daily
- US10Y at the turning point
- TMK-2 looks attractive ahead of TMK-3
- HCFB-3 offers good value...

• US10Y at a turning point now – watch level 4.57%
• TMK-2 looks attractive ahead of TMK-3placement
• HCFB-3 offers good value with controlled credit risk

Rouble bond market

On Thursday, trading activity on the domestic bond market was quite substantial in the government and municipal sectors, although the corporate sector suffered from a lack of trader attention. Price reacted accordingly: long-term government bonds did not move much from their Wednesday levels, while many corporate papers retreated downwards.

US10Y may have reached short-term yield limit, level 4.57% to be watched
Recently 10-year Treasuries have been holding almost still in the tight range 4.58-4.625%. On the intraday yield chart the benchmark rate clearly demonstrates the potential to form a double top figure with yield highs located at the 4.625% level reached on both 14 and 15 February. The figure will be completed if in the next few days US10Y closes below 4.57%, which will signal that in the short-term perspective the rate is in the slightly downward sloping yield channel currently bounded by the range 4.3-4.6% and having a potential to take US10Y as low as 4.25% in May 2006.
So far, our current medium-term view for US10Y remains negative based on the prospects of several more rate hikes in the US, but further price action may shift it in the short term to a more positive side.

Secondary trading in the corporate sector
Price changes of high-grade corporate bonds: Gazprom-4 -10bp, Lukoil -34bp, RZhD-3 -5bp, FSK UES -20bp. Second-tier issues: Pyaterochka-2 -1bp, Salavat-2 -10bp.
Among short bonds, TMK-2 is currently trading at 8.1% to put in 14 months, which makes this paper look attractive, especially in the light of the placement of TMK-3 scheduled for 21 February. The latter paper is marketed at 8.15% to put in two years, so the current position of TMK-2 clearly offers a premium over this point, considering the slope of the yield curve between the two terms. Therefore, we recommend buying TMK-2 above YTP 7.9%.
HCFB-3 (rated B-/Ba3) still offers an appealing YTP 8.9% for 14 months. We have many times stated that we consider the difficulties faced by the bank in 2005 to be temporary, which means that the current yield levels represent a good buying opportunity. In addition, HCFB remains one of the best capitalised banks in Russia due to the direct capital inflow from its parent company.
Among long bonds, our priorities have not changed: VolgaTel-2 (YTP target 8%), VolgaTel-3 (YTM target 8.15%), Pyaterochka-2 (YTM target 8%), RusAl-3 (YTM target 7.25%).

Short-term market view
The money market remains in good shape, so prices of long bonds are well supported now by cheap rouble funds. On the other hand, it is clear that the market’s prospects now mostly depend on the dynamics of US Treasuries, which are currently limiting the upside of Russia’30 and correspondingly, long-term OFZs. As US10Y now appears to be at a point of high uncertainty about the direction of the further movement, this represent the major source of risk to the local market. Next week will likely demonstrate higher short-term rates due to large tax payments by Russian companies, while it cannot be ruled out that US10Y will start a notable trip up from its current levels. As a result, next weeks’ prices could turn out to be a good entry point to the secondary market ahead of another step up. Our current recommendation for long rouble bonds remains a Hold, but we will be reviewing this next week.

Dmitry Dudkin, Moscow (7 095) 755 5480