Fixed Income Daily: Sovereign market recovering after rumours of additional Aries type issuance were confirmed as only rumours by the Germans

Sovereign market recovering after rumours of additional Aries type issuance
were confirmed as only rumours by the Germans. Corporates continue to be
firm with light volume.

EXTERNAL DEBT MARKET
Russian Eurobonds repeated the base asset (US Treasuries) pattern and
added ј - Ѕ% yesterday. The yield of the 10Y UST decreased from 4.10%
seen on Friday to 4.05% by the middle of the trading session yesterday,
prompting the Russia-30 to rise to 99.125. Russian Eurobond spreads to
UST narrowed by 3-4 bp, reaching 288 bp in the Russia-30. The low UST
yields remain a derivative from record high oil prices, which make the
majority of investors believe that the rate of global economic growth will be
less than earlier expected, given such energy prices. In such
circumstances, the speed of interest rate growth should be moderate over
the next few years. Only by the end of the day did a 4% fall in oil prices
allow the 10Y UST yield to increase to 4.07%, but no more. As a result,
Russian Sovereign and corporate Eurobonds retain their March – April
2004 highs. Practically all the Russian corporate and bank Eurobonds
remained well bid, adding ј - Ѕ %. The only exception was the Severstal-
14, which fell ѕ % on profit taking and low liquidity on the buying side. In
general, we believe that a short-term rally in Russian Eurobonds on the
Russian spread narrowing is already over. During the last 3 weeks, the
Russia-30 spread to the 10Y UST narrowed from 310-330 bp to 275-295
bp, i.e. by 40 bp on average, while over the last 2-3 months, the spread has
narrowed by 50-60 bp. We believe that the spread will fluctuate within a
range of 275-295 bp in the Russia-30 at least for the next 1-2 months, and
should narrow further to 250-270 bp by the late 2004 – early 2005, when a
seasonal New Year rally should begin. Until then, Russian Eurobonds
should follow the base asset. We would like to say once again that we do
not foresee the US Treasury market to deteriorate seriously over the next
few months, and therefore recommend that investors stay long Russian
Eurobonds.
LOCAL DEBT MARKET
The market retained its positive mood on Monday, as most first-tier issues
saw moderate increases of some 0.2% on average turnover. The second
tier mostly outperformed the rest of the market, with the most actively
traded bonds adding 0.5-0.7% on average. The long OFZ yield curve
remained at 7.5-7.85% on minimal investor activity. The main drivers of
growth in the first tier remain the medium-dated Moscow bonds, which see
faster yield decreases on the way of their spread narrowing to the OFZ
yield curve. It is worth noting that the Moscow-31 and -40 spread to OFZs
has narrowed from 150-170 bp as of early October to 70-80 bp. The
current spread seems to be fair enough, and there is hardly any potential of
its further narrowing in the short term, notwithstanding the beginning of
repo operations and lombard crediting by the Central Bank. A rally in
Moscow municipals leaves some growth potential for the corporate first tier,
but second tier bonds are now turning the most promising ones. Our
favorites are the second-tier issues, which have upside due to their spread
narrowing to blue chips. We pay special attention to the second-tier issues
positioned close to the first tier, which have upside due to their spread
narrowing to the first tier, such as the AIZhK-2, the Evrazholding and the
Russian Standard-2, -3.