Fixed Income Daily: In view of the recent developments, we do not change our view of the Russian Sovereign Eurobond market and expect the Russia-30 spread to narrow to 200 bp in early 2005

EXTERNAL DEBT MARKET
The Russian Eurobond market was mixed and volatile yesterday. During
most of the day, Russian Sovereign Eurobonds were unchanged or inched
down. At the same time, corporate Eurobonds saw a sell-off against the
background of tax claims to Vimpelcom. This news shocked the entire
Russian financial market, as the opinion that the “Yukos case” would not
extend to the whole Russian economy, which used to be a commonplace
point of view earlier, has been shattered. Investors have realized that many
companies bear a serious risk of following the fortune of Yukos. The
leaders of the fall were unarguably the Vimpelcom-09 and -11 bonds, which
nose-dived by 5-6%, while their yields rose by 110-130 bp. Other Russian
corporate Eurobonds lost Ѕ - 1Ѕ%. However, the interesting events began
in the evening. Against the background of strong growth in US Treasuries
(as the yield of the 10Y UST fell to 4.12%), there appeared the news that
Moody’s had assigned an investment grade rating to Gazprom. This news
prompted a sharp rise in the prices of Gazprom bonds. The Gazprom-34
closed at 114.500 in Moscow and further surged to 116.500 in New York,
and this morning the price has already reached 119.000. At the same time,
Russian Sovereign Eurobonds saw serious growth. The Russia-30 traded
at 102.00-102.250 in Moscow, while its spread was 240-245 bp, and its
price increased to 103.00-103.125 in New York, while the spread returned
again to its record low of 230 bp.
In view of the recent developments, we do not change our view of the
Russian Sovereign Eurobond market and expect the Russia-30 spread to
narrow to 200 bp in early 2005. However, we recommend that investors
avoid Russian corporate Eurobonds except Gazprom papers.
LOCAL DEBT MARKET
The news of tax claims to Vimpelcom for more than RUB 4.4 bn for only
the year 2001 made the company’s bonds plummet yesterday, as their
yield increased by 220 bp to 10.35% annualized. A sell-off in the
Vimpelcom papers and strengthening of the US dollar in the global and
domestic market caused a general deterioration of situation in the ruble
bond market. The Russian Railways bonds were priced to yield more than
initially planned, and the most liquid issues fell in the secondary market by
as much as 1.5%. In the government bond sector, only the short OFZ
27023 saw demand. Most of the other issues shed 0.1-0.2%. The long OFZ
yield curve was up 3-5 bp to 7.6-7.9%. In Moscow municipals, price
declines were more significant, as the most actively traded issues lost 0.4-
0.9%. The spreads of long Moscow municipal over OFZs widened by 4-5
bp to 19-39 bp. The sector’s outsider was the medium-dated Moscow-40,
whose spread widened by 30 bp to 133 bp. In corporate blue chips, the
outsider was the Gazprom-3, which lost 0.9% by the market close. The
majority of other liquid corporate issues lost 0.5-1%.