Fixed Income Daily: This morning, the market has somewhat recovered. The Russia-30 has risen to 99.625-99.750

EXTERNAL DEBT MARKET
The US Treasury market remained unchanged yesterday following the
release of relatively neutral US economic data. On the one hand, the
growth of US GDP in 3Q04 surpassed expectations at +3.9% vs. 3.7%
anticipated, but at the same time there was no increase in the GDP
deflator, a gauge of inflation, which essentially means that economic
growth is not producing inflationary consequences, which decreases the
probability of interest rate hikes by the US Fed. Simultaneously, the
consumer confidence index was also noticeably below forecasts. As a
result, the 10Y UST yield remained at 4.35%, a four-month low. Many
investors note that this yield level may be attractive for buying US
Treasuries. Nevertheless, Russian Eurobonds extended losses against this
background and shed another Ѕ -1% on their further spread widening to
UST by 3-8 bp. The Russia-30 fell to 99.375 by the end of trading in
London, while its spread widened to 258 bp. Against this backdrop, all the
Aries issues advanced, positively reacting to redemption of Russia’s debt
to the Paris Club. The spread of the Aries-14 over the Russia-30 has
already narrowed to 15 bp, while at the time of the bond’s issue in July
2004 the spread was 180 bp. Preschedule redemption of Russia’s debt to
the Paris Club actually equalizes the Aries and Eurobond risks, which
means no yield premium. In corporate Eurobonds, the Sistema-08 and -11
increased against a decline in the broad market, adding 1/4-3/8%. This
morning, the market has somewhat recovered. The Russia-30 has risen to
99.625-99.750
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 of the medium-dated OFZs inched down 0.1-0.2% against the
background of increased trading activity. The yield curve of long issues was
marked up 5-8 bp to 7.58-7.83%. The Moscow municipals somewhat
recovered after a considerable fall on Monday, and the spreads of long
Moscow issues over OFZs narrowed by 5-7 bp to 28-33 bp. In sub-
Sovereigns, the main turnover was, as usually, concentrated in the Moscow
Region bonds, which lost 0.2%. The yield curve of corporate blue chips did
not change significantly; the Gazprom-3 was traded the most actively and
declined by 0.2%. In other corporate blue chips, prices were just marked up
or down. In the second and third tiers, price volatility has increased, but
turnover remains rather low. This morning, the US dollar fell below 28
RUB/USD, which is a level of December 2000. The Central Bank has
declared not long ago that a US dollar’s decline vs. the Euro by one cent in
the global market corresponds to the ruble strengthening vs. the dollar by
10-15 copecks in the domestic market. Moreover, the Ministry of Economy
has already increased its inflation forecast for 2004 to 11.5% yesterday.
Thus, current developments in the global forex market do not leave the US
dollar a chance to strengthen vs. the ruble for the time being. The monetary
authorities are now in a very tough situation, and, following a significant
increase in inflation guidance (by 1.5%), a decrease in the Central Bank’s
RUB/USD guidance below the 28 level as of the end of 2004 does not look
unreal already. A positive effect on the secondary market of ruble bonds is
eliminated due to stagnation in governments bonds. Minimal spreads of
non-government bonds over OFZs in the secondary market force investors
to take profits and either go to the primary market or increase the share of
equities in their portfolios.