Russian Debt Market Daily: Provided moderate inflation data, emerging markets have a good chance to extend their rally in the medium term. As a result, Russian Eurobonds extended gains yesterday.

EXTERNAL DEBT MARKET

The recent four- or five-day growth in emerging market bonds was fueled
further by the US economic data published yesterday, which produced new
demand for high-risk debt. The US PPI and industrial production were
unexpectedly into the red, while initial jobless claims came out higher than
expected. This considerably decreases the probability of further interest rate
hikes in the US, at least at the next several Fed meetings. This matter
should be finally clarified today with publication of the US CPI. Provided
moderate inflation data, emerging markets have a good chance to extend
their rally in the medium term. As a result, Russian Eurobonds extended
gains yesterday. The growth was especially aggressive in the Aries bonds.
The Aries-14 increased another 0.75% and hit a new high of 104.25-104.50.
The Russia-30 increased to 92.750-92.875. Spreads to US Treasuries shed
another 3-5 bp. Russian corporate Eurobonds extended gains by another
0.25-1%. The leaders of the growth were the long-maturity Gazprom bonds.
Russian bank Eurobonds are recovering fast (+0.25-0.75%).

LOCAL DEBT MARKET

Most OFZs added another 0.3-1.3% on average on medium turnover
yesterday. The yield curve of long issues is now at 7.5-7.95%. The most
actively traded Moscow municipals and first-tier corporates increased 0.1-
0.3% in rather quiet trading. The market is now likely to pause ahead of
possible further yield decreases. The first tier has but returned to its “precrisis”
levels, and consolidation at the current levels may be expected in the
short term. On the one hand, excess ruble supply from major investors and
generally greater investor demand for liquid and reliable instruments makes
investments in this segment rather promising, suggesting a possibility for
the segment to outperform the market, provided full market revival.
However, investors have currently returned to basic considerations, when it
is possible for them not to fear a price collapse in the first tier on technical
factors, and thus they may analyse fundamental attractiveness of yields,
including currency premium, inflation level and other factors. This, in turn,
may entail less investor activity, as investors will need to reassess the
prospects of the ruble debt market recovery and make judgement as to its
attractiveness relative to the key inter-bank credit, Eurobond, and currency
markets. In the second and third tiers, yield decreases may be expected
against the background of minimal trading activity. There are no major
buyers of illiquid issues at no significant yield premium now, while most
banks are now unwilling to sell at “default” yields.