Fixed Income Daily: The main event this week is to be the placement of the Russian Railways
bond, which has all the prerequisites to become a blue chip

EXTERNAL DEBT MARKET
The US Treasury market has been falling throughout the last week in
anticipation of high US November payroll figures. The majority of investors
were sure that the data would surpass the forecasts, which should prompt
the US Fed to raise its interest rates at the next FOMC meeting on
December 14. As a result, the 10Y UST yield reached a 4-month low of
4.41%. However, the data appeared to be considerably below market
expectations, as only 112K new jobs were created vs. 200K expected and
337K the previous month. As a result, the US Treasury yields fell sharply,
to 4.25% on the 10Y UST. In line with this, Russian Eurobonds also
appreciated quite sharply. Several minutes prior to the publication of the
US economic data, the Russia-30 traded at 99.875-100.00, but rose to
101.00-101.0625 in the first minute after the data release, and closed in
London at some 101.250-101.375, having risen by 1% to the previous day.
The spread of the Russia-30 to US Treasuries remained at 242 bp. As the
data was released by the time the market closed, a reaction was seen only
in Sovereign issues. Corporates had no time to increase. Relative
stabilization of the situation in the Ukraine also rendered Russian papers
appreciable support. The Ukraine-13 Eurobond, traded at 96-98% in the
middle of the last week, appreciated to 102.00 on Friday and has already
reached 104.500 today.
This morning, the market has remained at its Friday’s closing levels. The
Russia-30 is now trading in the range of 101.125-101.250.
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 leader in turnover among government bonds was the OFZ 46001,
which inched down 0.1% by the market close. The long OFZ yield curve
continues growing, as the yield on the OFZ 46014 has already reached
7.9% annualized. Overall investor activity in the sector remains extremely
low, with prices mostly just marked up or down. In Moscow municipals, the
medium-dated Moscow-37 and -40 continue to be the most actively traded,
while their spreads to the OFZ yield curve have narrowed to 76-96 bp.
However, any changes in the spreads between medium-dated OFZs and
Moscow municipals are less representative than developments in the
spreads between long-term issues due to higher price volatility observed in
short- and medium-dated OFZs. The yield spread of the longest 39-th
Moscow issue decreased by 7 bp and reached a new record low of 13 bp.
In corporate blue chips, trading was choppy against the background of
minimal turnover. In the most liquid corporate issues, non-aggressive
buying continues prevailing against the backdrop of extremely low trading
activity.
The main event this week is to be the placement of the Russian Railways
bond, which has all the prerequisites to become a blue chip. The latest
Lukoil auction has shown that there exists great demand for first-tier bonds
from large investors, who are under pressure of excess ruble liquidity and
are ready to buy first-tier bonds at auctions at a discount. Nearly entire
absence of bids on the Lukoil in the “grey market” has rendered the issue
unattractive for speculatively oriented investors. The Russian Railways
bond is likely to face the same destiny. Thus, we do not expect aggressive
profit taking in the already traded issues ahead of the auctions.