Russian Fixed Income Daily
- Bernanke pushes US10Y and euro up
- EBRD placed its second rouble floater
- TMK-3 looks attractive above YTP 8.5%...

FX and money market

On Thursday, the rouble traded in the range of RBL/USD27.36-27.39 following movements of the euro/dollar. In expectation of the speech from the Fed’s Ben Bernanke, market participants preferred to sell dollars totalling around USD3bn (very high for daily turnover) from which some USD2bn was bought by the CBR at RBL/USD27.39. In addition, during tax payment periods dollar sales usually increase. Later in the evening, the dollar dropped significantly to USD/EUR1.254 from USD/EUR1.243 after the Federal Reserve chairmen gave a signal that a pause in the current cycle of interest rate hikes is possible and that further actions by the Fed would depend on economic development. Consequently, as a logical response of the weakness of the dollar against the euro, this morning we are seeing the rouble at RBL/USD27.27. Today we forecast the rouble in the range of RBL/USD27.25-27.30.
Today\'s scheduled release of US 1Q06 GDP figures could also affect the euro/dollar.

Currently interbank overnight interest rates have risen to 5-6% on the back of today’s scheduled profit tax as well as the end of month effect. With the end of large tax payments, the liquidity problem should improve at the beginning of May.


Olga Golub, Moscow (7 495) 755 5176
Rouble bond market

On Thursday, the local debt market showed surprising strength, as on average it held its ground with US Treasuries trading at yield highs not seen since 2002. Trading activity was relatively low in the government sector, although prices of long-term government bonds even managed to grow marginally. The situation in the corporate sector was less positive, and in the morning certain high-grade issues continued the decline of previous days while closer to the evening more buyers appeared following the upward rebound of US10Y. Over the day prices showed no clear tendency.
The spread of Russia’30 over US10Y is currently 102(-4)bp (close to fair now, with a compression potential of 10bp from an historical standpoint), while the spread of OFZ 46018 over Russia’30 is 89(+9)bp (wide in the medium-term perspective, our target for it is 50bp).

Bernanke’s testimony pushes up US Treasuries and the euro
Yesterday’s testimony on the outlook of the economy by the Fed’s Ben Bernanke did not clarify the situation regarding the future of the board’s target rate.
Basically, the chairman stated that a pause in rate hikes is close, but at the same time explicitly indicated that such a break would not preclude a continuation of increases in subsequent meetings. Bernanke said that even if the risks for the economy are not completely balanced, the Fed might stop raising the target rate ‘at some point’ in order to gain more data about the economy’s development.
Following the publication of Bernanke’s speech fixed income traders acknowledged, although with some initial hesitation, that the testimony was less hawkish than could have been expected and started buying US Treasuries. As a result, US10Y reduced its yield from 5.12% to the current 5.06%.
FX traders had less hesitation, so at the moment the speech headlines appeared in the news, the euro jumped up against US dollar reaching as high as USD/EUR1.2547 compared to USD/EUR1.2440 yesterday morning.
July Fed funds futures were also affected by the speech, shifting from 5.16 to 5.075% indicating downward reassessment of the probability that the rate would reach 5.25% on 29June.
Nevertheless, the question remains - while it is quite certain that the Fed will raise its target rate to 5% on 10 May, no clear signal was given as to whether another rate hike will happen on 29 June. It is very probable that market participants will be looking for an answer in today’s US 1Q GDP release. This figure will be important as it is expected to show that the American economy managed to restore high growth rates after the relatively slow 4Q2005. GDP is expected by the market to have grown by 4.9% in the quarter compared to 1.7% in the previous one.
Overall, the upward correction in US Treasuries we’ve been expecting recently would have already started if not for the threat that the Fed could continue raising its target rate beyond 5.25%. This scenario is believed to be of low probability by most analysts, but until there’s any clarity on this topic US Treasuries will remain vulnerable. The most probable point we will see a clear picture is the FOMC meeting on May 10.

EBRD places second rouble bond
The AAA-rated bank successfully placed RBL5bn of its second five-year rouble floater linked to three-month Mosprime rate to a syndicate of underwriters.
The first coupon rate for the issue is fixed at 5.56%, which is quite attractive. What should help the paper in the future is that its coupon reset date is located near the end of the month, meaning that new coupons will always be assigned in situations of low liquidity due to regular tax payments, i.e. the coupon rates should be systematically above the average money market level.
On the other hand, EBRD-2 is still a long-term instrument, so its holding period return is not guaranteed to equal the coupon rate. As a result, it is quite obvious that EBRD-2 will be traded very similar to EBRD-1, i.e. on average with a discount of 10-30bp to par value.

Secondary trading
Price changes of high-grade rouble bonds: OFZ 46018 +5bp, Moscow-44 -1bp, Gazprom-4 -20bp, Lukoil -8bp, RZhD-6 +17bp, FSK UES-2 -8bp.
Second-tier papers: MosReg-6 +19bp, Magnit -14bp, Megafon-3 -23bp, RSB-4 +3bp, Salavat-2 +0bp, SibTel-4 -4bp, TMK-3 -10bp, CenTel-4 +3bp, UTK-4 -12bp.
Today we continue drawing your attention to medium-term papers, many of which currently look very attractive.
TMK-3, a bond of TMK - one of the world leaders in tube production, was yesterday trading at 8.75% to put in 28 months, which in our view is too high for this high-quality borrower. TMK-3’s spread over the OFZ curve is close to 235bp, while shorter TMK-2 is now at 7.9% to put in 11 months, 215bp over the curve. We estimate a fair YTP for TMK-3 at 8.5% and recommend accumulating the paper, which is currently offering good value as a passive investment, although it does not lack speculative upside should market sentiment become positive.
Megafon-3 continued falling yesterday having lost 23bp in price. As a result, the paper was trading at 7.89% to maturity in two years, which is quite attractive, especially considering that the paper is now yielding almost as much as the neighbouring NWTel-3 (8% for 23 months), a bond of North-West Telecom (a B+-rated regional telecom), which is notably inferior to Megafon in credit quality. Megafon is rated BB-/BB by S&P/Fitch.
Also in the telecoms sector, UrSI-6 continues to look quite interesting, currently located at 8.45% for 32 months. This is one of the highest-yielding telecom bonds in the second tier, although this is ungrounded from a credit standpoint. We believe that a fair level for the paper’s YTP is 8.25% and recommend accumulating it. Uralsvyazinform is rated B+/B+ by S&P/Fitch.
We continue to recommend bonds of the Russian Standard bank. Market participants should take a look at the RBL3bn RSB-4 located at 8.55% to maturity in 23 months. We believe that these bonds are now approximately 20-25bp above their fair yield levels. Russian Standard bank is rated B+/Ba2 by S&P/Moody’s.
Finally, RusAl-3 traded yesterday at 7.8% YTM for 29 months. We estimate the long-term fair point for the paper to be 7.5%. Apart from simply having an attractive yield, we believe that RusAl-3 promises additional upside due to the expected transparency increase in 2006-2007 that Russian Aluminium promised investors in 2005.

Short-term market view
The expected improvement in money market conditions in May should drive prices of rouble bonds up in the nearest future as long as US Treasuries do not make another large step down. Nevertheless, even if they do so, the room for spread compression between LT OFZs and Russia’30, as well as between Russia’30 and US10Y, will allow the local market outperform dollar debt in the current environment of rising interest rates. As a result, our general recommendation for long rouble bonds remains a Hold.

Dmitry Dudkin, Moscow (7 495) 755 5480