Fixed Income Comment: Although supply concerns have led to modest weakness in these credits, namely ALROSA and MTS, we expect the respective pricing of these issues to remain tight

Despite Russian eurobond prices confined to narrow ranges yesterday the
sovereign yield curve moved lower in response to a stronger UST and the Russian
EMBI+ index outperformed its peers, up 0.22% over the day. On a spread basis,
the move was less profound and the Russian EMBI+ spread was flat over the day
at 226 bps. With volumes improving compared to the previous day Russia’s
benchmark bond opened at around 1023/4 and despite initially trading lower to
10211/16, a late pick up in UST provided the impetus to move higher and RU30
closed at a 10215/16. Given that price moves were confined to a 3/8 range, the
RU30 spread over 10-year UST traded within a 232 bps to 236 bps range. The
ARIES curve witnessed a slight recovery of its recent losses in early trading and
resulted in the ARIES \'14 spread over RU30 tightening from -2 bps to -4 bps. The
impetus was subsequently eroded on headline news of an ‘underperform’
recommendation and the ’07 EUR FRN and ’14 credits reacted negatively, closing
unchanged over the day. In general, Russian corporate and banking sector
eurobonds were relatively flat across most sectors. While the Gazprom ’13 and
’34 were marked higher on positive corporate developments, the Vimpelcom
credits outperformed the market on news that the initial claims against its
Kazakhstan subsidiary would prove untenable. Further announcements yesterday
from Alfa BANK and VTB confirm that Russian corporates and Banks are expected
to resume their wave of issuance in early 2005 and contribute to over US$1 billion
of debt scheduled for placement in January. Although supply concerns have led to
modest weakness in these credits, namely ALROSA and MTS, we expect the
respective pricing of these issues to remain tight.
Russia has opened this morning with RU30 trading at 10215/16 (+234 bps over
UST) and we expect prices again to remain rangebound ahead of today’s half-day
holiday in the US (President Bush’s inauguration). Looking ahead, in the absence
of any event driven risks over the next week we expect the market to trade
relatively tight, as market participants remain cautious ahead of the forthcoming
FOMC meeting (2 February), non-farm payrolls (4 Febrarury) and G7 meeting in
London (4-5 February). The conclusion of these events will provide further clarity
on the likely pace of removal in the Fed’s accommodative policy. Despite
yesterday’s somewhat neutral inflation outcome, real interest rates remain
historically low and at the long-end, the real 10-year UST yield (adjusted using
headline CPI) is currently under 1%. In our view such levels are not sustainable.