Fixed Income Daily: We believe that this time there are all the necessary conditions for the country spread to continue narrowing, and therefore recommend that investors stay long Russian Eurobonds

Stay long R30\'s or the spread. Better yet, be long Aries 14. Even better, be
long Russian corporates.

As the sovereign spread tightens to the UST, we will see the the corporate
spread tighten to the sovereign.

EXTERNAL DEBT MARKET
Russian Sovereign Eurobonds considerably narrowed their spreads to US
Treasuries yesterday. In turn, Russian corporate Eurobonds noticeably
narrowed their yield spreads to Russian Sovereign issues thanks to a
frontal price rise in all the Russian Eurobonds. At the same time, the US
Treasury market generally retained its price levels, while the yields of US
Treasuries have been hovering around their monthly highs. The US ISM
Non-Manufacturing Index came out worse than expected, but its
component showing the state of the labor market (employment in the
services sector) demonstrated robust growth. This even more increased
investors’ confidence that the US payrolls to be published on October 8
would be high, which does not stimulate yield decreases of US Treasuries.
As a result, the yield of the 10Y UST stabilized at 4.17-4.18% yesterday.
Against this background, Russian Sovereign Eurobonds began growing
aggressively from the morning and added Ѕ - 2% for the day. The Russia-
30 increased to 97.000, while is spread narrowed to 300 bp. Intraday, the
spread was as narrow as 297 bp. Russian corporate Eurobonds also grew
considerably, while their yields shed 20-30 bp during one day. The leaders
of the growth were the long Gazprom issues (13,34, 20), which appreciated
1Ѕ - 2%, and the Sibneft-09 (+ 1Ѕ%). Other corporates increased Ѕ -1%.
Technically, Russian Eurobonds have approached the levels where profit
taking may step up again. In particular, the Russia-30 has reached again a
spread level of 300 bp to UST already seen multiple times over the last 2
months, where investors preferred to take profits each time. Nevertheless,
we believe that this time there are all the necessary conditions for the
country spread to continue narrowing, and therefore recommend that
investors stay long Russian Eurobonds.
LOCAL DEBT MARKET
Most OFZs inched down on more turnover on Tuesday. The yield curve of
the long issues reached 8%. In the Moscow municipals and corporate blue
chips, prices increased 0.2-0.4%, with most demand observed in mediumand
long-dated issues. Sub-Sovereigns and second-tier corporates were
mixed. Rather considerable OFZ and Moscow municipal placements are
upcoming. The issuers have been occupying diametrically opposite
positions recently, which resulted in continued selling in government bonds
along with resumed uptrend in Moscow municipals. The Central Bank and
the MoF were inclined to provide premiums at “market” auctions, as it is
evident that market investors may be interested in government bonds only
from the viewpoint of an opportunity to receive speculative profits. This
prompts investors to bid up government bonds ahead of the auctions.
Moscow, in turn, has been always quite miserly at auctions, but the results
of the latest auctions, with bonds placed at a discount, do not allow to hope
for a big premium even in the 10-year issue. Now, when the market is
growing (the main drivers are a high level of ruble liquidity and sharply less
devaluation expectations against the background of the healthy external
debt market), it seems appropriate to buy medium- and long-dated Moscow
issues rather than attempt to drive yields higher ahead of the auctions. The
yesterday’s auctions took place without surprises, with yields determined as
expected. The most “market” of the issues seem to be the SMARTS bonds.