Fixed Income Daily: We believe that in the course of this correction, Russian Eurobonds would retain their spread to UST or even narrow it

UST treasuries continue their strong move on the back of the rise in th eprice of oil. It seems to be the same story every day. The question of whether or not $60 oil kills off economic growth? Whenever it ends it is clear that we are not going to see $20 oil for a long time. OPEC now knows the economic growth can co-exist with $30- 35 -even $40 oil. Sure these lofty levels won\'t last forever, but Kudrin and co are using these windfall profits wisely (thus far!) and a fall in the price will certainly be managed once it reaches the $40ish level. All good news for Russian sovereign debt and corporate debt.

With only 8 days to an extreemly tight US election, market uncertainty will only increase. THis should support the UST rally. US equities look sick and unless they bounce soon, the tax selling season will be brisk.

EXTERNAL DEBT MARKET
Further rise in oil prices and plummeting stock markets worldwide
prompted a noticeable fall of the US Treasury yields on Friday and today.
The yield of the 10Y UST fell from 4.03 to 3.93%, hitting a new low this
year. As a result, Russian Eurobonds added another ј - ѕ % and
approached their record highs. Russian Sovereign Eurobond narrowed
their spreads by 3-4 bp to US Treasuries. The Russia-30 increased to
100.500 (the record high is 102.00), while its spread narrowed to 282 bp.
Meanwhile, growth in corporate Eurobonds slowed down a bit to 1/8 - ј %.
We continue to believe that in the short term, the US Treasury market and
emerging bonds markets will most likely enter a stage of technical
correction after their wild rally of the last weeks. We believe that in the
course of this correction, Russian Eurobonds would retain their spread to
UST or even narrow it. In the medium term (by late 2004 - early 2005), we
expect the Russian spread to narrow at least 25-30 bp. In particular, we
expect a spread of 250 bp in the Russia-30 by the beginning of 2005.
LOCAL DEBT MARKET
A new sharp spike of the ruble (with the spot dollar exchange rate dipping
below 29 rubles, and 6-12-month NDFs falling to 28.8-29.1 RUB/USD)
along with remaining excess ruble liquidity prompted more demand for
government bonds. The most liquid issues added 0.35-0.75 %, while the
yields of long-dated bonds fell to 7.55-7.8% annualized. A decrease in the
OFZ yields allowed the long Moscow municipals to appreciate, with their
yields decreasing to 7.87-7.98%, while their spreads to OFZs shed 5 bp to
15-20 bp. The spreads of medium-dated issues narrowed 20-30 bp on
average to 75-100 bp, with the Moscow-31 and -35 leading the market. In
corporate blue chips, the Gazprom-3 traded the most actively. Prices
increased 0.1-0.3% on average across the sector. In second-tier
corporates, worth noting is Vimpelcom growth of 1% and Tattelecom
adding 0.9%. The rest of the most liquid issues appreciated 0.5% on
average. In the environment of record high oil prices and the need to
achieve government targets in inflation and real strengthening of the ruble,
lowering of the dollar support level by the Central Bank looks as an
adequate response of the monetary authorities to Euro strengthening
against the dollar rather than capitulation of the Central Bank. At the same
time, the lower OFZ yields do not look yet as a transition to new
fundamental levels, which limits upside in the yields of blue chips. In the
current situation, we believe the second tier to be the most promising.