Fixed Income Daily: UST treasury rally holding up R30\'s. Spread stable but seems to have a widening tendency. Corporates remain strong.

EXTERNAL DEBT MARKET
US Treasuries saw some yield increases during most of the day yesterday.
The yield of the 10Y UST rose to 4.14% from 4.10%, which made Russian
Sovereign Eurobonds ease by ј -1 %. The Russia-30 was as low as
98.6875 compared to 99.375 the day before. The Russia-30 spread to UST
widened to 286 bp. Meanwhile, demand for corporate Eurobonds remained
high, allowing most issues of the segment to show healthy gains. The
leader of the growth were the Sibneft-07 and 09 bonds, which added
another 1%, as investors placed positive bets on the news of upcoming
final merger unwinding with Yukos, burdened with problems. However, the
rally in US Treasuries gained steam again by the evening in Moscow. The
growth was catalyzed by new oil price increases, which further supported
the opinion than the US economy growth rate would be slower than
expected. At the same time, demand for US Treasuries increased against
the background of considerable fall in the US equity market, as the Dow
Jones broke through 10 000 downwards. The yield of 10-year US Treasury
Notes fell to 4.06% in New York, prompting the Russia-30 to recover to
99.00-99.25. The spread remained at 285 bp, slightly up from 275 bp seen
on Monday and Tuesday.
We remain optimistic on the Russian Eurobonds’ prospects and remind
about their wide spreads to Mexico, Bulgaria, South Africa and Tunisia
bonds having similar credit ratings. We believe that S&P and Fitch may
speed up their decisions on Russia’s rating upgrades after the country’s
rating outlook improvement by Moody\'s. This even more strengthens our
belief that Russian Eurobond spreads to US Treasuries and to other
emerging market bonds are to narrow further. At the same time, we believe
that the US Treasury market is unlikely to be highly volatile over the next
few months so as to significantly hinder performance of emerging bond
markets.
LOCAL DEBT MARKET
The majority of the most liquid issues depreciated 0.2-0.5% in profit taking
on Wednesday on average turnover. The long OFZ yield curve remained at
7.52-7.83%. Long Moscow municipals eased on average 0.1-0.3%.
Corporate blue chips and telecom bonds also lost some 0.3%. Second-tier
issues generally continued growing, having all the prerequisites for further
spread narrowing to the first tier. High ruble liquidity and absence of evident
negatives prevent the market from a deeper correction for the time being.
Nevertheless, the Central Bank stabilized the RUB/USD exchange rate at
29.11 and explicitly warned the market of “possible speculators’ financial
losses”. The ruble has all the fundamentals to strengthen further, but the
Central Bank, which controls the exchange rate, is still obliged to prevent
real ruble strengthening of more than 7%. We remain optimistic about the
prospects of the ruble debt market. However, the latest rally makes the first
tier very much dependent on the external debt market performance as well
as on the USD exchange rate. Among corporate blue chips, long corporate
issues and medium-dated Moscow municipals look the most promising,
trading at a wide spread to government bonds. However, our favorites are
second-tier bonds (especially those of the issuers positioned close to the
first tier), which have an upside due to their spread narrowing to blue chips.