Fixed Income Daily: The Russian papers have no alternative to further spread narrowing. The potential of spread narrowing is still rather noticeable – some 30 bp

EXTERNAL DEBT MARKET
The US Fed raised its interest rate by 0.25% yesterday, as had been
expected. The FOMC noted again that keeping inflation under control
would permit to increase interest rates at a moderate pace. On such an
expected decision and expected commentary, the short US Treasury yields
increased again (+4 bp to 3.32% in the 2Y UST), while the 10Y UST yield
rose by only 2 bp to 4.15%. At the same time, the 30Y UST yield fell. The
UST yield curve continues actively flattening.
The US labor market data (the payrolls are to be published tomorrow)
should determine further UST market performance.
Against his backdrop, Russian Eurobonds closed unchanged yesterday.
The Russia-30 remains in a narrow range of 105.125-105.250, while is
spread has narrowed to 210 bp today. Corporate Eurobond prices changed
no more than ¼% yesterday.
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. The potential of spread
narrowing is still rather noticeable – some 30 bp.
LOCAL DEBT MARKET
The auctions of Moscow bonds were the main market event yesterday.
Their results caused a rally in the secondary market of Moscow municipals.
The re-opened Moscow-41 and -42 issues were priced to yield 25-30 bp
less than the most optimistic expectations, as a result of non-residents’
demand. In the end, most Moscow issues added 0.3-0.9% in the secondary
market. Due to faster Moscow municipal yield decreases, the yield curve of
Moscow bonds now practically coincides with the OFZ yield curve, which
completely deprives the bonds of Moscow of further growth potential in the
absence of OFZ price growth.
We will most probably see profit taking and yield increases in the near
future. In other market segments, situation did not change significantly. In
the government bond sector, non-aggressive purchases across the entire
spectrum of issues were seen, with the long OFZ yield curve remaining at
7.54-7.95% for the day. In the first tier, the Gazprom bonds saw buying.
The second tier was mixed against the background of selective
transactions.