Fixed Income Daily: RU30\'s trading at 232 over, we expect this to close to 200 in the early part of 2005

Is it year-end already? Seems only the accounting departments are busy!

RU30\'s trading at 232 over, we expect this to close to 200 in the early part of 2005. But play the spread as we have no idea where the UST will be trading -- but our hunch is at the rate they are today!

EXTERNAL DEBT MARKET
The Russian Eurobond market saw significant price increases in its
Sovereign segment yesterday against the background of the two main
drivers: steady expectations of Russia’s credit rating upgrade in a few
weeks and a sharp surge in the US Treasury market. As a result, Russian
Sovereigns hit their new record highs yesterday. The Russia-30 increased
to 103.50-103.625 by the end of the day, while is spread narrowed to 333-
335 bp. Also added to market optimism the news background concerning
Russia’s early debt repayment to the Paris Club, as Russia is ready to
redeem its entire debt ($40 bn) during the next three years. In turn, the US
Treasury market rallied considerably yesterday, with the 10Y UST yield
down from 4.17% to 4.07% over two days, following the US Fed statement
that inflation remains under control and future interest rates increases
would be moderate.
Russian corporate and bank Eurobonds also rose considerably yesterday,
adding 0.25% - 1%, but did not reach record highs. The Russian corporate
Eurobond yield spreads over Sovereigns have considerably widened
recently on the back of the “Vimpelcom affair”. Even the Gazprom papers
have been lagging behind the growth of Sovereigns over the last few days.
Today, the market has remained at its yesterday’s closing levels. The US
Treasury market is stable in anticipation of the next portion of US economic
data to be published at 16.30 MSK, including initial jobless claims and
Philadelphia Fed.
We still recommend that investors pick the Rus-30 at a spread over 250 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.
LOCAL DEBT MARKET
The first tier continued recovering on Wednesday after a sell-off last week.
The long OFZ yield curve increased by 5 bp to 7.6-7.8% annualized as a
result of the OFZ 46014 re-opening, but most issues saw buying and added
0.1-0.3 %. In the Moscow municipal sector, prices increased by 0.2-0.5 %,
while spreads over OFZs narrowed by 8-10 bp to 16-37 bp at the long end.
Among corporate blue chips, the leader was the Gazprom-2, which rose by
0.7%. In other corporates, non-aggressive buying prevailed, with the
Vimpelcom bonds outperforming and their yield already below 11% as of
yesterday. Nevertheless, the company’s political risks are still very high,
and the yield is unlikely to return to its \"pre-crisis\" level of 8% until the
situation around tax claims comes to an end.
If no general deterioration of the country’s investment climate ensues, there
should be no evident reasons for a significant market and liquidity fall in the
near future. Excess ruble liquidity still outweighs practically all the market
negatives. On the other hand, there are also no reasons for the first tier to
quit sideways trading. Therefore, we recommend increasing positions in the
second tier ahead of the long weekend.