Russian Fixed Income Daily
- Pipeline not a threat so far
- OFZ 46020, MosReg-5, Pyaterochka-2, VolgaTel-3 our top picks
- TuranAlem attractive above YTP 7%...

• Primary pipeline gradually filling, but not a threat so far
• OFZ 46020, MosReg-5, Pyaterochka-2, VolgaTel-3 - our top picks among long bonds
• TuranAlem offers good value above 7%

Rouble bond market

Friday was a rather strong day, when prices of long-term rouble bonds were supported by the traditional end-of-week effect, together with sufficient rouble liquidity and rising rouble. Growth was most notable on the OFZ curve, as well as among high-grade corporate papers, while the municipal sector largely remained stationary. US Treasuries consolidated gains on Tuesday and Thursday.

Primary pipeline not a threat so far
Although the managers of new rouble issues resumed their activity somewhat after the problematic period following the downward correction in mid-March, so far the aggregate volume of scheduled auctions is not posing a significant threat to prices of long-term rouble bonds. The total sum of sizes of new corporate bonds until the end of March is RBL13bn, which is not a heavy burden for the rapidly expanding local bond market. It is probable that in addition to this quantity, we will see additional placements of OFZ bonds, but so far the next OFZ auction is scheduled only for 19 April, when RBL20bn of long-term government bonds will be offered to the public.
The two key corporate placements this week are UrSI (Uralsvyazinform), and Dixi (a large Russian retail chain), both having a size of RBL3bn, which will be further discussed in our weekly update tomorrow.

Secondary trading
Price changes of high-grade bonds: OFZ 46018 +49bp, Moscow-39 +0bp, MosReg-5 +3bp, Gazprom-4 +20bp, Lukoil +38bp, RZhD-6 -1bp, FSK UES-3 +9bp. Second-tier issues: Megafon-3 -5bp, Pyaterochka-2 +4bp, Salavat-2 +9bp, CenTel-4 +14bp.
Our top picks have not changed much from our prior update.
OFZ 46020, duration 12.1 years, +31bp on Friday, now at 6.98% YTM, our target 6.85%.
MosReg-5, duration 2.9 years, +3bp on Friday, now at 6.99% YTM, our target 6.75%. Moscow region is rated BB-/Ba3 by S&P/Moody’s.
Pyaterochka-2, duration 3.9 years, +4bp on Friday, now at 8.69%YTM, our medium-term target 8%. Pyaterochka is rated BB-/Ba3 by S&P/Moody’s.
VolgaTel-3, duration 3 years, +1bp on Friday, now at 8.53% YTM, our target 8.15%. VolgaTelecom is rated B+ by S&P.
Among shorter issues, Bank TuranAlem appears quite attractive. Currently located at 7.06% YTP for seven months, the bond is trading in line with bonds of B+ and BB- rated businesses, such as UrSI-3, Megafon-2, Vimpelcom, etc., being rated BB/Baa2/BB+ by S&P/Moody’s/Fitch. Such a situation appears to be the result of a general dislike of investors towards banks on the local market, but the key fact is that TuranAlem represents not the Russian, but the Kazakh banking system, which is renowned for being strong and well-developed compared to the majority of the banking systems of the former Soviet Union. We believe that above the 7% level, the bond of TuranAlem provides a very good risk-reward tradeoff. As the bank recently cancelled placements of two new bond issues, the existing TuranAlem rouble bond remains the only chance to gain exposure to this bank on the rouble bond market.

Short-term market view
US Treasuries recently showed market participants that demand for them is still high enough to defend against sharp falls, as even minor yield tops continue being regarded by investors as good buying opportunities. As a result, a large fall on the American market is now very unlikely. Meanwhile, the rouble is growing and liquidity in the Russian financial system remains high. This ensures stable demand for rouble instruments in the nearest future, promising modest price appreciation that is most likely to materialise in the first half of April. Our general recommendation for long rouble bonds remains a Hold, which does not preclude accumulation of the cheap papers mentioned above.

Dmitry Dudkin, Moscow (7 095) 755 5480