Fixed Income Daily: Nevertheless, the Russian spread remained at its record low

US figures and their influence on UST market is more important at the moment than any news out of Russia. Traders are alternatively watching the Safin match from downunder or looking at the near white-out conditions just outside our windows.

News that BNP is pulling out of the Russian Standard deal should not cause too much concern as the reason seems to be all about price. there must be another eager buyer waiting in the wings.

EXTERNAL DEBT MARKET
The 2Y UST yield was higher than expected at the yesterday’s auction
(3.245% vs. 3.236% expected) and reached a new high since May 29,
2002. At the same time, the share of foreign purchases fell to less than
30% compared to 34% at the previous auction. Against this background,
the yields of US Treasuries somewhat increased yesterday, which caused
profit taking in Russian Eurobonds. Nevertheless, the Russian spread
remained at its record low.
The Russia-30 eased to 104.250. Most Russian corporate Eurobonds lost
ј%. Today, the market has remained at its yesterday’s levels.
Today and tomorrow, very important data for the US Treasury market are
due out. Today, the durable goods orders and initial jobless claims figures
are to be published, and US 4Q04 GDP growth is to be published
tomorrow.
We recommend that investors pick up Russian Eurobonds on dips. In
particular, we recommend buying the Russia-30, should its spread to US
Treasuries exceed 235-240 bp. We target a Russia-30 spread of 150-170
bp and price of some 105.00 by the end of 2005.
LOCAL DEBT MARKET
The market was mixed on Wednesday against the background of low
turnover. A higher currency premium of ruble papers (up to 200-250 bp)
after a rally in Eurobonds cannot serve a reason to buy the first tier due to
ruble weakening and a generally negative investor mood. Long-term
expectations of general interest rate growth in the market along with
inflation acceleration are mounting up among market participants. The
future auctions of the Moscow and Gazprom bonds also exert certain
negative pressure on the market. At the same time, the general level of
ruble liquidity, the only factor of support for the market now, is gradually
decreasing.
Governments bonds were mixed, with the most actively traded OFZ 46001
down 0.1 %. The yield curve of long issues decreased by 1 bp to 7.66-
8.07%. The first “reference” OFZ 25057 was placed at an auction at a
premium to the market without much investor rush. In the Moscow
municipal sector, trading was rather dull, with prices mostly just marked up
or down. Among corporate blue chips, only the Gazprom-5 was traded
relatively actively, its price unchanged.