Fixed Income Weekly: Ahead of the meeting of the US Federal Open Market Committee, it is highly likely that the situation will quickly stabilize and the prices of most bonds will level off

External Debt

Last week on the external debt market was a rollercoaster ride. On Friday
and Monday, we saw only part of the picture, with first US then Russian
investors out of the action due to respective public holidays. This was
followed by flat trading on Tuesday and Wednesday as the prices of most
bonds trailed after the US Treasuries and players showed little interest.
Then came Thursday, and a sonic boom.
First, the market was became awash with rumors that Fitch was poised to
upgrade Russiaнs rating (this was allegedly why representatives from the
agency were in Moscow this week), which caused Sovereign spreads to
tighten somewhat. Then, President Putin announced that the government
was not interested in seeing YUKOS go bankrupt, which was music to the
ears of investors, many of whom see the oil companyнs problems as the
main barrier preventing Russia from reaching investment grade. As a result,
Sovereign prices went skyward (with the Russia 30нs spread narrowing to
300 bps), as did the Eurobonds of Gazprom and Sibneft.
The wave of euphoria caused by these events may ebb. Ahead of the meeting
of the US Federal Open Market Committee, it is highly likely that the situation
will quickly stabilize and the prices of most bonds will level off.

Domestic Debt

Last weekнs ruble bond market was quiet due to the fairly high money
market rates, which hovered at 610% (in terms of overnight credits) right
up until Thursday, thus dampening sentiment. And this was despite
concerted efforts by the monetary authorities to bridge the liquidity gap.
Alongside conducting the traditional REPO operations, the authorities
reduced the rate of payment into the obligatory reserve fund from 9% to
7% as of June 15, which some estimate freed up an extra R37 bln or so
within the banking system. This was seemingly the key factor that brought
down rates on Thursday to 0.512% (the gold and forex reserve growth rates
also started picking up gradually, which will also increase the supply of
rubles). This optimism was given a further boost by growth on the other
markets in response to positive developments in the YUKOS affair. The
result was a rise in the prices of the most highly rated bonds.
We do not expect money market rates to rise at month end, which presupposes
that ruble bond prices will rise in the near term. This week, liquidity on the
ruble bond market should improve and prices should pick up.