Fixed Income Daily: Russian Eurobonds continued growing steadily on Friday, appreciating all in all 3% at the long end over the last two trading days

EXTERNAL DEBT MARKET
Russian Eurobonds continued growing steadily on Friday, appreciating all
in all 3% at the long end over the last two trading days. Thus, the market
has considerably recovered after a sell-off at the beginning of the last
week. The negative background of the Yukos case has somewhat eased,
which made the US Treasury market the main driver. Meanwhile, the US
Treasuries have surged over the last two days, due to several reasons.
First, record high oil prices bring up concerns about sustainability of
economic growth. In this connection, the 2Q04 US GDP data came out
considerably lower than expected on Friday, at 3.0% vs. 3.7% expected.
Second, information on Al Qaeda reportedly preparing new terrorist attacks
on the major US cities appeared on Friday, also stirring up more demand
for US Treasuries. As a result, the yield of the 10-year US Treasury Notes
fell from 4.60% to 4.43% over two days. Against this background, the
Russia-30 added another 0.5% to 99.000-99.125 in Moscow trading on
Friday, and the price reached 92.000 later in New York, although it was
only 89.500 on Wednesday. It is worth noting that the Aries bonds
outperformed the market again. The spread of the Aries-14 to the Russia-
30 has already narrowed to 95 bp, thus decreasing by half over the last
month. Russian corporate and bank Eurobonds rose by 0.125-0.875%. We
remain optimistic about the Russian Eurobond price trend in the medium
and long term. Russian issues look cheap from the viewpoint of their
spreads to US Treasuries and to other EMD, which should let them remain
immune to some extent to interest rate hikes in the US. From the technical
point of view, the market has more than once demonstrated during the last
few months that demand for the Russia-30 tends to increase considerably
when the spread reaches 350 bp, while sellers become significantly more
active when the spread falls below 300 bp. The spread is near its upper
boundary now (at 340 bp), and therefore we expect buyers to dominate in
the market in the medium term.
LOCAL DEBT MARKET
The majority of the most liquid issues added 0.1-0.3% on Friday in rather
quiet trading. Among the Moscow municipals, the most actively traded was
the 31st issue, which remains yielding the most in the sector. In the Sub-
Sovereign sector, buying prevailed on more trading activity, with the
Moscow Region bonds being the leaders in turnover. Among the corporate
blue chips, the VTB-4 saw the most turnover, while its position on the yield
curve looks rather attractive to us. In the second and third tier, selective
buying was observed. No important events are to take place in the primary
market this week, and thus the secondary market should continue to be
driven largely by the external debt market. In the second and third tier, we
expect sporadic activity to stay in place. Given the current conditions in the
domestic currency market and in the Eurobond market, it is possible to
expect a weak uptrend to hold in the ruble issues. For the market to quit
sideways trading, there is still insufficient clarity in the external markets and
not enough investors in the domestic market, as part of them are on
vacations.