Fixed Income Daily: We do not see a reason for the spread to widen in the circumstances of good macroeconomics and high oil prices

EXTERNAL DEBT MARKET

Despite some US Treasury yield increase yesterday, Russian Eurobonds
remained in an upward trend, which resulted in their spread narrowing to
UST for the first time in a long while. The Russia-30 held firmly above
94.000, whilst its spread to the 10Y UST narrowed to 323-325 bp from 330-
335 bp seen over the last 2-3 weeks. US Treasury yields added some 5 bp
against the background of an equity market rally and considerable
decrease in the oil prices. In this situation, the UST market even did not
react to an extremely low Empire Manufacturing index, which came out 2.5
times less than expected. The Aries-14 increased noticeably again, adding
0.875%, which resulted in the Aries-14 spread to the Russia-30 narrowing
to 80 bp already. Against this background, Russian corporate Eurobonds
appreciated by 0.125-0.5%. Today, the market has remained at its
yesterday’s level. The Russia-30 has stabilized at 94.125-94.250 by
midday, with the spread at 323 bp. The important US consumer inflation
data due out today should determine the future market direction in the short
term. 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. Overall, we remain
optimistic and expect the spread of Russian Eurobonds to US treasuries to
narrow further by 20-30 bp in the next few months. We do not see a reason
for the spread to widen in the circumstances of good macroeconomics and
high oil prices, and at the same time we believe that political risks (the
Yukos case) have been already entirely priced in.

LOCAL DEBT MARKET

The majority of the most liquid issues inched down 0.1-0.3% in rather quiet
trading on Monday. The main driver is the upcoming today’s large-volume
Centertelecom-4 placement, which exerts pressure on the secondary
market. Investors do not show an obvious desire to participate in the
auction in the situation of the vacation season and lack of ideas, creating a
general negative informational background around the placement itself and
the market in general. Slightly worth ruble liquidity and such factors as
some increase in the RUR/USD exchange rate, as well as more volatility in
the external debt market, exert quite limited influence on the ruble debt
market. The market outsiders remain the long Moscow municipals, which
lost some 1% on medium turnover yesterday. Against the backdrop of
market stagnation, with more impending placements of not only first-tier
corporates but city municipals as well, we continue recommending to focus
on the medium-term Moscow issues, which remain the highest-yielding on
the yield curve.
In the corporate first tier, non-aggressive selling prevailed on almost no
turnover, with the TNK outperforming the market. In the second and third
tiers, selective deals remain in place, forming no general market direction.
A limited range of issues traded indicates more interest in the enough short
and high-yield bonds of the most reliable issuers