Weekly Eurobonds_2010_07_26

Themes of the Week

Previous weeks resemble each other. It is hard to highlight the single driver for such growth of investors’ optimism because there are plenty of them and come from different parts of the world. We point out some of them, which unlike released statistics are not in sight of investor community and are hardly predictable.

For instance, Fed chairman Ben Bernanke’s address before Senate Banking Committee was of great importance in our view. He endeavored to ease risks of deflationary scenario. We also were willing to tell about them, having said that inflationary expectations do not take a back seat, while Fed is ready for new steps to support economic recovery, i.e. in case of the economy would be slipping into a new deflationary spiral, Fed would uncover printing machine. In light of this, the Beige Book will be of a particular interest, its release is scheduled for this week. Follow-ups on economy of the selected states by key macro indicators are expected to be announced – labor market, real estate market, PMI. Macro readings look mixed…

The second important factor is comments of financial and monetary authorities of China regarding that in 2H10 the government and the People’s Bank of China intend to encourage consumer growth, enhance state spending efficiency and accelerate economic growth. What is that? Is it the change of paradigm? Is the Chinese government not interested in price pressure any more? It looks like the scale (on the one hand, $750 bln international reserves invested into the US Treasuries, while inflation growth on the other) turns to the rescue of funds or at least a part of them. Apparently, commodity market positively reacted on the news. Either on this background or not, the market began to spread rumors on possible Russia’s sovereign ratings revision (upwards, of course). In turn, it resulted in spike of demand for Russia’s sovereign risks. Some investors were in panic and closing short positions, while others were in a buying spree on the wave of overall risk appetite growth. We still recommend selling and opt for the strategy similar to that for ruble bond portfolio – sell under high prices first of all bonds with a high duration.

This week the same sentiments as on the currency market will set a tone for sovereign bond market. In our view placements of short- and mid-dated notes and bonds of Italy, which filled out the calendar, will be on the radar screen.

We still believe that sovereign spreads are set to widen in the offing. All we see on the market now looks like demand testing. Offerings of sovereign risk grow day by day, Belarus as well Kazakhstan is also placing bonds. According to our rough estimates, EU countries will have to refinance about EUR0.3 trln in 2H10. As we have already stated, EU countries’ debt payments will peak in July (about EUR70 bln) and then in September, but it is also necessary to cover the US budget deficit…

This week two-, five- and seven-year mid-term US Treasuries will be issued. We expect strong demand. Why would that be, is it favorable environment globally?