Fixed Income Daily: At present, based on the widened spread of Russian Eurobonds to UST, and other EMD, we recommend buying Russian Eurobonds on dips

EXTERNAL DEBT MARKET

The Russian Eurobond market continued trending down yesterday after an
upward rebound on Friday. Along with the domestic factor in the shape of
the “Yukos case”, a foreign factor revealed itself in the form of US
Treasuries\' decline against the background of the tomorrow’s auction of 2-
year US Treasuries. Investors feared low demand from Japanese investors
at the auction, which caused a general yield increase of US Treasuries of
5-7 bp yesterday. The yield of 10-year US Treasury Notes rose to 4.49%
from 4.44% seen in the early Moscow trading. In the end, Russian
Eurobonds lost 1-2% yesterday.
The Russia-30 held most of the day around 91.250-91.500 yesterday, but
fell to 90.750 by the end of the day, and extended losses to 90.375 this
morning. However, most of the fall was associated with spread widening to
UST, as the spread of the Russia-30 to the 10Y UST has already increased
to 350 bp. It should be noted that prices are falling in a very thin market,
against the background of the peak of the summer holiday season.
In the Russian corporate Eurobond segment, liquidity was even worse
yesterday. For 60-70% of the issues, there were even no quotes on broker
screens, while sporadically traded papers lost some 0.5%. At present,
based on the widened spread of Russian Eurobonds to UST, and other
EMD, we recommend buying Russian Eurobonds on dips.

LOCAL DEBT MARKET

Deprived of one of the most liquid issues, with the Gazprom-3 blocked
before coupon payment, the market has fallen in almost full dormancy. It
looks like an objective decrease in business activity is coming into play due
to the summer holiday season, in addition to a general liquidity decline
associated with the recent crisis. This spring and summer have been rich
with events compared to the previous ones, and it is possible to assert with
a good deal of probability that the market has been somewhat tired of
crises and uncertainty. This results in the desire of most market investors
to restrain from abrupt market moves without need. Despite attractive
enough yields, the market risks of interest rate increases and liquidity drop
are still strong in the minds of market investors. Major commercial and
State banks remain the main players in the market, as they are less worried
about the need to earn enough in order to offset their expensive
obligations, and can afford buying first-tier issues with medium-term
investment horizon.
The majority of the most liquid issues were mixed within ± 0.1-0.3% on
minimal turnover on Monday. The yield curve of long issues is now at 7.5-
8%, and there are no substantial reasons or resources to move significantly
away from the current levels. In Moscow municipals, most demand was in
medium-term issues, which appreciated up to 0.1%. Among corporate blue
chips, the most actively traded was the RusAl-2, which fell slightly. Among
second-tier issues, selective buying prevailed. In the third tier, nonaggressive
selling continues.