Fixed Income Daily: We anticipate the Russia-30 spread over UST to narrow to 200 bp during the next three or four weeks

EXTERNAL DEBT MARKET
The US economic data published yesterday proved unfavorable for the
bond market again, with initial jobless claims below expectations and
durable goods orders (without transportation) higher than expected.
However, the long 10Y UST saw its yield rise only temporarily to 4.23%
from 4.21%, and the yield returned to 4.20-4.21% later in New York. Only
the short 2&5Y US Treasuries react to the economic statistics that comes
negative for bonds. The 10Y UST yield has already risen to 3.29% from
3.21% during this one week. Thus, the US Treasury yield curve continues
flattening actively.
Against this background, Russian Sovereign Eurobond prices remained
unchanged for the day, with the country spread steadily narrowing each
day. The Russia-30 is currently traded at 104.125-104.375, while its spread
has already reached 214 bp.
In Russian corporate Eurobonds, many issues continue gradually rising.
It is worth noting that there are many shorts in the market opened by
Russian players in long-maturity Russian Sovereign issues, while longs are
insignificant. Many Russian participants are skeptical regarding the
narrowing of the Russian spread, while considerable buying comes from
London and New York.
Against the backdrop of significant shorts in the market, we anticipate the
Russia-30 spread over UST to narrow to 200 bp during the next three or
four weeks, and, against anticipated relative 10Y UST yield stability, we
expect the Russia-30 to reach a new record high of 105.00-105.500. And
this will not be a speculative move, as Russian Eurobonds are
fundamentally ready for an even greater spread narrowing.
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
Non-aggressive price growth of some 0.1-0.3% prevailed in the nongovernment
first tier on Thursday against the background of more trading
activity, while the second tier was mixed.
Overall investor activity in the government bond sector remains low, with
only the OFZ 46002 traded rather actively yesterday and its yield up 1 bp to
7.84%. The long OFZ yield curve was marked down 1-3 bp to 7.63%-
8.06%. In Moscow municipals, most demand was concentrated in shortmaturity
issues, which inched up 0.2%. Against this background, most
medium- and long-dated issues were marked up 0.2-0.5%, while the
spread of the longest Moscow-39 over OFZs narrowed by 1 bp to 27 bp. In
corporate blue chips, the most liquid issue remains the Gazprom-5, up
another 0.5% yesterday. However, the bond had begun trading in the
secondary market above par in mid-December, or 1-1.1% above its current
price level. Among other corporates, telecom bonds (the CenterTelecom-4,
the URSI and the SMARTS) saw healthy demand along with “quality” food
sector bonds – the WBD and the SunInterbrewF. Official termination of
negotiations between BNP Paribas and Russian Standard Bank did not
exert substantial negative pressure on the latter’s bonds, as it had been
already priced in, and the bonds lost 0.3% for the day.