Fixed Income Daily: Against the background of strong Russian Sovereign Eurobonds, demand for Russian corporate Eurobonds has not been increasing

Market calm and very much caught in a tight range. The UST market will drive the Russian market in the short term. Today\'s Fed decision and Friday\'s figures will have more impact than any news out of Moscow.

There is a great deal of talk lately about the risk of stagflation in the Russian economy. I think the talk is a bit over-the-top, but combatting inflation is certainly an important issue. Right now the only tactic seems to be an agreement to let the ruble strenghten. This will of course help, but it is not enough.

EXTERNAL DEBT MARKET

The global bonds market is waiting for the US Fed interest rate decision to
be published today. The Fed is expected to raise its key rate again by 25
bp to 2.50% and to declare once again its policy of gradual measured
interest rate increases in the future. In this situation, the yield of the short
2Y UST is rising, following the Fed rate, while the 10Y UST yield still
remains unchanged. Over the last 1.5 years, the short 2Y UST yield has
already increased thrice, while the 10Y UST yield has even decreased
slightly. The UST yield curve is flattening aggressively, and it is yet unclear
what should take place for the long UST yields to begin rising. Maybe the
January 2005 US labor market data (the US payrolls are to be published
on Friday) will become a signal for selling. So far, all the US economic data
released this and last week have been favorable for the UST market.
Russian Eurobonds have renewed their smooth growth after brief profit
taking, with their spreads gradually narrowing. The Russia-30, having been
traded briefly below 105.00 (at 104.8125-104.9375), rose to 105.125-
105.375 as soon as the second half of the day yesterday on the report that
Russia had already redeemed its debt to the IMF ahead of schedule, and
the Stabilization Find of the MoF had grown to a new record high. The
Russian Eurobond spread still remains underpriced relative to the “ВВВ-“
yield curve in the international market, and thus the Russian papers have
no alternative to further spread narrowing. MDM Bank will publish today a
brief analysis of Russian Eurobonds’ fair spread after the country’s rating
upgrade by S&P. The potential of spread narrowing is still rather noticeable
– some 30 bp.
Against the background of strong Russian Sovereign Eurobonds, demand
for Russian corporate Eurobonds has not been increasing. S&P’s
comments concerning higher political risks in Russia and deterioration of
the country’s investment climate hardly help produce more investor interest
in non-government bonds. As a result, the prices of Russian corporate
Eurobonds have remained generally unchanged.

LOCAL DEBT MARKET

Buying prevailed in the market yesterday against the background of more
trading activity, as a consequence of Russia’s rating upgrade by S&P and
Kudrin’s words (see the News) concerning the probability of more
aggressive real ruble strengthening. As a result, most first-tier corporates
added 0.1-0.2%, while the second tier increased by 0.2-0.3%.
Most of the actively traded government bonds added 0.1-0.15%, with the
OFZ 46014 being the leader in turnover, its yield down another 4 bp to
7.95%, which drove the long OFZ yield curve down to 7.54-7.95%. Among
Moscow municipals, long-dated issues saw the most demand along with
the Moscow-31, which is the benchmark for today’s auctions of the
Moscow-41 and -42. Yesterday’s positives and the organizers’ commission
theoretically allow to place both issues at a yield discount to the secondary
market, and unsatisfied demand may cause the yields to decline in the
secondary market, which has been the reason of yesterday’s speculative
purchases. In the corporate blue chip sector, the leader of growth remains
the Gazprom-5, with its quotes having already almost achieved the face
value. In the second tier, worth noting is healthy demand for the most highyielding
telecom bonds – the CenterTelecom-4 and the SouthTelecom-3.