Fixed Income Daily: Despite upcoming mass placements of Eurobonds by Russian banks next week, bank bond prices remained high in the secondary market on continued demand

EXTERNAL DEBT MARKET

Yesterday was a very volatile day in Russian Eurobonds, but still resulted
in their further price increase. The open was quite positive, and the Russia-
30 surged to 96.4375 against the background of insignificant increase in
US Treasuries, while its spread to UST narrowed to 300 bp. But the 300 bp
spread level turned a resistance once again, and profit taking started from
there, all the more so that the yield of US Treasuries began growing ahead
of the speech by US Fed Chairman Greenspan. On the first words
pronounced by Greenspan, who said that the economy continued growing,
the yield of the 10Y UST increased to 4.29%, and the Russia-30 fell to
95.6875. However, Greenspan proceeded to say that a number of sectors
of economy were growing slowly, while inflation had decreased over the
last few months. He also said that the US Fed was not going to abandon
the policy of moderate interest rate increases. Investors chose to focus on
Greenspan’s words concerning low inflation and envisioned slow pace of
interest rate increases, and this resulted in the strongest rally in US
Treasuries over the last 3 weeks. The yield of 10-year US Treasury Notes
fell to 4.15% by the New York close, stopping only 5 bp short of its 4-month
low. Against this background, the Russia-30 opened at some 96.250 this
morning, but the spread nevertheless widened again to 310 bp. It looks like
there is a considerable volume in the market ready for selling at a spread
level of some 300 bp in the Russia-30, but we believe that the spread of
the Russia-30 may break the level of 300 bp on its way down and fall to
280 bp, targeting 250 bp by the end of the year. Russian corporate
Eurobonds saw continued demand. Demand was especially strong in the
Sistema-08, -11, and the Vimpelcom-09 bonds, which added 0.5%. The
WBD-09 increased by a healthy 0.75%. Despite upcoming mass
placements of Eurobonds by Russian banks next week, including MDM
Bank, the Bank of Moscow, Russian Standard, and Moscow Narodny Bank,
totaling some $800 mn to $1 000 mn, bank bond prices remained high in
the secondary market on continued demand.

LOCAL DEBT MARKET

Most OFZs decreased 0.2-0.4% on more turnover on Wednesday. Of the
two issue re-openings, the most successful was the auction of the OFZ
46014. The Central Bank provided a 7-10 bp premium to the market and
thus was able to place some 90% of the tranche. In secondary trading, the
issue yield fell to an already habitual 8.1%. Judging by the unsatisfied
demand, as the total demand was some RUB 2 bn, investors had counted
upon a greater premium. In the Moscow municipals, non-aggressive selling
prevailed. The corporate first tier was almost unchanged. The leader of the
sector was the RusAl-2, which still has a considerable upside due to its
spread narrowing to the corporate blue chips’ yield curve. In the second
and third tiers, buying of short-dated and high-yield bonds continued. The
logic of most investors is simple: if something is not growing at a breakneck
pace, sell it. Most speculators do not have a long investment horizon,
and their risk tolerance has begun to decrease again following the bank
crisis in June. Given certain stagnation in the market, there are two ways:
either go to a primary auction for a premium, or buy short and high-yield
second-tier bonds.