Russian Debt Market Daily: Demand is beginning to shift to the Russian corporate and bank Eurobond segment

EXTERNAL DEBT MARKET

Investors’ attention was focused again on the US economic statistics on
Friday. The July producer price index and Michigan confidence index came
out considerably less than expected, which caused further price increases
of US Treasuries. As a result, the yield of the 10Y UST fell to a 4-month
low of 4.19%. Thus, the rally in the US Treasury market continued despite
a new interest rate hike by the Fed. The latest US economic data speak in
favor of further moderate Fed rate increases, which considerably
diminishes the risks of investments in bonds. Against this background,
investor demand continues prevailing in the emerging debt market.
Russian Eurobonds continued their steady increase, with the Russia-30
trading at 94.000 (+1%) by the end of the trading session in Moscow on
Friday. Still, the growth of Russian Eurobonds remains in sync with US
Treasuries, leaving the spread to the non-risky asset practically unchanged
over almost a month at 330-340 in the Russia-30 vs. the 10Y UST.
Demand is beginning to shift to the Russian corporate and bank Eurobond
segment, which appreciated quite noticeably on Friday. Medium- and longdated
issues added 1%, including the Sistema-08, the Vimm-Bill-Dann-08,
the Severstal-09, the Vimpelcom-09, and the Severstal-14. Corporates’
spreads to Sovereigns narrowed 15-40 bp over one day. The market added
a bit more this morning, with the Russia-30 reaching 94.125-94.250. The
market remains extremely inactive. Investors are waiting for the tomorrow’s
US consumer price index. If the index comes out higher than expected,
profit taking may begin in the market, since the prices of US Treasuries and
Russian Eurobonds have reached their 4-month highs. On the other hand,
if the inflation reading is moderate, then price increases are likely to be
insignificant due to the same reason: the current high price levels.

LOCAL DEBT MARKET

The most actively traded OFZs and first-tier corporates closed almost
unchanged on Friday. In the Moscow municipal sector, non-aggressive
selling was seen at the long end. Investor activity decreased considerably
across the board ahead of the new RUB 7 bn placement by
CenterTelecom, which arouses investors’ doubts. The issuer and investors
understand that a yield premium needs to be offered at the auction, given
the current market conditions, the issue volume, and the issuer’s position in
the industry. The issuer has indirectly indicated an approximate coupon
yield of 13.5%, formally implying a yield of some 14% annualized to a put
option in 2.3 years. Despite common investor skepticism, there may be
quite a few investors willing to buy the bond even at such a premium to the
telecom yield curve. In general, we do not expect the market to change
significantly in the short term and remain optimistic about the market
prospects in the medium term.