Russia Fixed Income Weekly

Russian external bonds appreciated last week, following US Treasuries, as the latter gained on weak macroeconomic data. Domestic debt was unchanged, as rouble liquidity remained under pressure.
The rather weak US macroeconomic data released last week increased traders’ convictions that the Fed is likely to start loosening its monetary policy. The futures on the Fed rate now indicate that the market expects the base rate to be cut by over 50 bp in the next twelve months. As a result, the yield on the benchmark 10-year issue fell to 4.43%, a level not seen since January. The gains in Treasuries triggered impressive growth in Russian Eurobonds, while the spreads of the latter remained mostly unchanged. The benchmark Russia 2030 issue added 1.02%, with its spread down by 2 bp to 114.
Corporate Eurobonds also demonstrated strong performance last week, with the Deutsche UFG CEB Index adding 0.55% and its spread narrowing by 3 bp to 195. The largest gains were seen in the Telecoms sector (+0.85%), after both MTS and Vimpelcom reported strong 3Q06 results.
Domestic conditions remained unfavourable last week: end of the month tax payments, performed by banks on behalf of their clients, again triggered a further decrease in rouble liquidity. Overnight interbank rates reached rarely seen levels of 9-10%. Towards the end of the week the situation showed signs of improvement, with overnight rates declining to 4-5%. This, however, is still above the comfortable zone. Overall, domestic bond prices saw little change. Both the RGBI and RCBI Indices ended the week flat.
We expect a more significant domestic liquidity improvement in the coming month, as increased budget spending towards the end of the year will pour fresh cash into the market. Rouble assets have underperformed external bonds over the last few months, and the liquidity increase should trigger robust growth in the domestic debt market.
The primary market was rather inactive last week, as issuers chose to wait for more favourable conditions. Rb 8.5 bn worth of new paper was placed. This includes Rb 5 bn of seven-year bonds from Gazprombank, sold at a yield of 6.65%. This week the total volume of planned corporate issues is Rb 21.9 bn, including Rb 5 bn of three-year bonds by UES Federal Grid Company.
Authors: Dmitry Dmitriev ([email protected])
Mikhail Volkhonsky ([email protected])