Fixed Income Daily: We believe that as soon as in January or February, the spread may narrow to 200-220 bp, and next year, the target may become a spread level of 150 bp

EXTERNAL DEBT MARKET
Positive opening in the Russian Eurobond market on Friday against the
background of previous positive news (Russia’s rating upgrade to an
investment grade and progress at the negotiations with the Paris Club on
early redemption of Russia’s debt) gave way to a sell-off when the Moscow
market closed, late in the evening in London. Profit taking was triggered by
a sharp spike in US Treasury yields following the speech of the US Fed
Chairman in Frankfurt. Greenspan said that a large US trading deficit was
causing less demand for the American currency, and noted that investors
who were not prepared to an increase in interest rates might suffer losses.
As a result, the yield of the 10Y UST rose to 4.20% by the evening from
4.10% during the day. In turn, the Russia-30, which traded at 103.00-
103.25 (a spread of 232 bp) in Moscow and closed at 102.750, fell in New
York to 102.00 (a spread of 238-240 bp). In New York, the bond saw the
lowest deals at 101.625-101.750.
Before the evening sell-off, Russian corporate Eurobonds maintained their
aggressive growth. The Gazprom bonds added another Ѕ - 1%. The bonds
that had earlier lagged behind the broad market rally over many months,
grew aggressively. In particular, the Alrosa-08 and the Vimpelcom-11 rose
sharply, adding 2.5% to 106.125 and 2% respectively. The Norilsk Nickel-
09, which had remained below 100.00 during 1.5 months, broke through
this level at last and reached 100.875-101.000.
The approaching end of the year and an extensive rally in Russian
Eurobonds over the last 3-6 months justifies profit taking. Let us remind
that the Russia-30 spread has narrowed to 230 bp from 350 bp during two
months, while its price has increased to 103.500 from 85.00 in May and
95.00 at the end of the summer. Thus, investors have earned enough
profits in Russian Eurobonds to close this year relatively successfully. We
recommend that investors buy Russian Eurobonds on the bonds’ spread
widening. In particular, we believe that the Russia-30 should be bought in
case of its spread widening over 250 bp. We believe that as soon as in
January or February, the spread may narrow to 200-220 bp, and next year,
the target may become a spread level of 150 bp.

LOCAL DEBT MARKET

Most OFZs remained unchanged on Friday. The yield curve of long issues
is at 7.5-7.77%. In Moscow municipals, the most actively traded was the
medium-dated Moscow-40. At the long end, spreads of Moscow municipals
to OFZs widened by 3-5 bp to 21-36 bp. In corporate blue chips, nonaggressive
selling prevailed. In other corporates, choppy trading amid
practically no volumes remains in place. The supplier of positive news to
the bond market, which has certain immunity to negative events inside the
country (from the stock market’s point of view), remains Fitch. Not limiting
itself to simply increasing Russia’s rating to an investment grade, Fitch has
evidently closed its eyes on the “Yukos case” and acknowledged that
Russia’s creditworthiness is equal to that of the countries rated “BBB” or
“BBB+”. Readiness of one more agency to upgrade Russia (as Moody’s
has upgraded recently its Russia’s rating outlook to positive) already within
the investment category serves as a sufficient guarantee that
reassessment by investors of risks of investments into Russia will be
accelerated only. The positive effect of this development for the ruble bond
market will probably be not too fast, but at the current level of ruble liquidity,
there are no reasons for any serious correction in the first tier. At the same
time, further market growth is limited due to stability of government bond
yields, which causes stagnation in the secondary market. In such
circumstances, it is possible to expect non-aggressive profit taking in
already traded issues and considerable demand at the upcoming primary
auctions.