Russian Debt Market Daily: Most Moscow municipals and 1st-tier corporates inched up 0.1-0.3% on medium turnover on Friday

EXTERNAL DEBT MARKET

The main event in the global bond market on Friday was the change in non-farm
and manufacturing payrolls in the US. The figures produced sort of a slight
shock, having come out at half of investor expectations. In the non-farm sector,
only 112K jobs were created in June instead of 250K expected. The industrial
sector even saw a decrease of 11K jobs, instead of an expected addition of
30K. The market reacted immediately and rather sharply. Because these data,
in fact, drastically degrease the probability of a rate hike by the Fed at its next
meeting in August 2004, the yield of US Treasuries immediately sank quite
sharply, by 15-20 bp. The yield of 10-year US Treasury Notes fell from 4.58% to
4.42%, hitting a 2.5-month low. The developments catalyzed a strong upsurge
in the Russian Eurobond sector. Although the Russia-30 traded at some 91.375
in the morning, it was as high as over 93.000 by the end of the day. The spread
of the Russia-30 to US Treasuries narrowed by 10 bp to 316 bp during one day.
However, the leaders of the growth were the Aries bonds. The Aries-14, having
traded at some 100.750 Friday morning, exceeded 103.00 by the market close,
while its yield fell 34 bp during one day. However, even despite such growth, the
Aries bonds remain extremely undervalued, with the Aries-14 yield exceeding
that of the Gazprom-13 and -14 Eurobonds. In Russian corporate Eurobonds,
only the liquid Gazprom-13 and -14 were fast enough to react to the increase in
Sovereigns, appreciating some 1%. Today, global bond market activity is
minimal due to a holiday in the US. As the main trade idea, we offer direct
buying of the Aries-14, as well as buying the Aries-14 while simultaneously
shorting the Russia-30. We expect the spread between these two bonds to
narrow to 100 bp in the course of 3-5 weeks from 150 bp now, and expect it to
reach 50 bp in 2-3 months.

LOCAL DEBT MARKET

Most Moscow municipals and 1st-tier corporates inched up 0.1-0.3% on
medium turnover on Friday. In the Moscow municipals, the most turnover was
seen in the medium-term Moscow-31 and -32 bonds, while among corporate
blue chips, the Gazprom-2 was the most actively traded. The telecom bonds
and 2nd- and 3rd-tier issues remain mixed on extremely low turnover. The OFZ
sector has almost entirely lost liquidity, which makes its price changes rather
indicative. Quite strong Russian Eurobond growth on Friday became a local
growth catalyst for ruble bonds. The yields already look attractive enough for
strategic buying, although temporary declines are still possible. As the yield
curve is now actually inverted, medium-term bonds look attractive for
speculative buying. A serious risk associated with the 2nd- and 3rd-tier bonds
remains the events taking place in the banking sector. Namely, the quantity of
medium- and small-sized banks that are having problems continues increasing,
which stimulates bond selling on their part. This also limits demand for these
assets from other investors, who are anxious that at any moment a new bank
having problems may emerge and may begin spinning off its bond portfolio.