Fixed Income Daily: Today, the market has remained at its yesterday’s closing levels

EXTERNAL DEBT MARKET
Russian Eurobonds declined considerably again yesterday against the
background of two factors: a significant US Treasury market fall and crisis
in the Ukraine. As a result, Russian Eurobonds hit a 5-week low yesterday.
The 10Y UST yield increased by 10-12 bp yesterday. Selling was prompted
by expectations of good US economic data and the labor market readings
in particular this week, which increases the probability of a new interest rate
hike by the US Fed, and also by investors’ unwillingness to own dollar
assets against the background of opinions favoring further dollar exchange
rate downside. Instability in the Ukraine, which is the main transit country
for the export of Russian energy, has also led to investors cooling about
Russian bonds. As a result, the Russia-30, having opened at 100.500, fell
to 99.875 by the end of the day, while its spread widened to 252 bp, up 4
bp. Over a week, the price has already shed almost 4%, and the spread to
UST has widened from 230 bp to 255 bp. The unequivocally positive news
of Russia’s intention to early pay its debt to the Paris Club ($46 bn) within 3
years, which means a decrease in the country’s external debt by 6-7% of
GDP at once, and the Minister of Finance’s words concerning assignment
of an investment grade rating by S&P (see the News) were largely ignored
by the market. However, in the medium term, these news may clearly
make the Russian spread narrow further. Against the background of such a
fall in the Sovereign segment, all the Russian bank and corporate
Eurobonds retreated by Ѕ-1%. Today, the market has remained at its
yesterday’s closing levels. The Russia-30 is trading in the range of 99.750-
99.875.
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
The majority of the most liquid issues fell by 0.2-0.5% against the
background of average trading volumes. The long OFZ yield curve
remained at 7.5-7.8%, with prices mostly only marked up or down. In long
Moscow municipals, price decreases reached 0.9%, while their yield
spreads to OFZs widened by 7-10 bp to 35-38 bp. There are still no factors
favoring a really serious correction in the market; thus, in case of further
spread widening, it is possible to recommend buying Moscow municipals.
In corporate blue chips, the leader in turnover was the Gazprom-3, which
followed the Moscow municipals on their way down and depreciated by
0.2%. In other corporats, selling prevailed, while selective buying was
noted only in some high-yield third-tier papers. A formal excuse for rather
aggressive profit taking yesterday became a local dip in the Eurobond
market. However, the main reason behind selling in the market remains
stagnation in the government bond sector, which practically entirely
eliminates the factor of excess ruble liquidity and positive effect for the
market from fast ruble strengthening. Minimal spreads of non-government
bonds to OFZs in the secondary market force investors to take profits and
to either go to the primary market or increase the share of equities in their
portfolios.