Daily Review of the Debt Market. Bernanke’s Speech: No Hints about New QE. Fitch Downgrades Spain. Strong Growth Followed by Decline

Bernanke’s Speech: No Hints about New QE. Fitch Downgrades Spain. Strong Growth Followed by Decline

In the Russian Eurobonds market continued to grow yesterday, supported by positive external background. By the close of trading Russian sovereign issues had grown by an average 0.6%. The average growth of the corporate bonds was 0.6-0.8%.
Yesterday most bonds in the ruble debt market closed up with an average growth of 0.4-0.5%. Trading activity was quite high.
Yesterday the People’s Bank of China reduced core interest rates by 25 b. p. Thus, 1-year lending rate has been reduced to 6.3%, while 1-year deposit rate has been decreased to 3.25%. Clearly, this decision has been made due to continuing economic slowdown in China.
Fitch has downgraded Spain by 3 notches from А to ВВВ with the outlook Negative. The key reason was the threat of declining financial stability of Spain due to the need of banking sector recapitalization. Thus, according to Fitch, about 100 billion euro will be needed to save the banking system, whereas previous estimates were 30 billion euro.
At the moment the background is highly negative. An intense flight to quality is being observed again. Brent is now losing more than 2.0% and is traded at 97.8$ per barrel. European indices opened with a sharp decline, while Russia-30 at times reaches 0.8%.
We see at least two reasons for such dynamics. First, market players were disappointed by the lack of hints about new stimulation programmes in Bernanke’s speech. Second, the markets negatively perceived Spain’s downgrade by Fitch by 3 notches to ВВВ with the outlook Negative. The markets are under pressure from the same issues of uncertainty in Europe, US economic prospects and possible FRS actions. Today we expect a sharp decline. Clearly, in circumstances of such strong volatility we recommend purchasing only short-term bonds and advise to temporarily refrain from investments in more volatile instruments.


Trading Ideas in the Bond Market

Eurobonds:

Strategy Buy & hold:

Lukoil-14
Bank of Moscow-15
TCS Bank-14
Promsvyazbank-14, 15
HCFB-14
Renaissance Capital-13
Kazkommertbank-13, 14

Ruble Bonds:

Strategy Buy & hold:

Gazprom-13
VTB ВО-5, ВО-7
RSHB-10, ВО-5
LUKOIL BO-1, BO-2
Gazprom Neft-3, BO-5 and BO-6
Bashneft-3