Fixed Income Daily: The leaders of growth among Russian corporate Eurobonds were the Vimpelcom papers

EXTERNAL DEBT MARKET
The yields of long US Treasuries continue falling fast, contrary to the
widespread expectations of yield increases. Meanwhile, the yields of short
papers continue increasing. The 10Y UST yield was as low as 4.01%
yesterday, while the 2Y UST yield rose to 3.32%. The clue to the 10Y UST
yield decline is the behavior of the 30Y UST, to which investors have been
paying less attention recently. The 30Y UST yield has been aggressively
falling throughout the last time on the expectations of a pension system
reform in the US, which should entail more demand for long UST from
pension funds. The 30Y UST yield has already fallen by 55 bp since the
beginning of the year, and by 22 bp over the last week, to a 1.5-year low.
As a result, a decreasing 30Y UST yield objectively puts downward
pressure on the 10Y UST yield, which has fallen to a new low since
November 2004.
Strong US Treasuries helped maintain further uptrend in Russian
Sovereign Eurobonds, which reached new record high prices yesterday.
The Russia-30 appreciated to 107.5625 by the end of trading in London,
while its spread narrowed to 197 bp (yielding 6.0% annualized). The
Russia-28 increased by 1.5% to 174.000.
The leaders of growth among Russian corporate Eurobonds were the
Vimpelcom papers, which added approximately 1% following an extremely
successful placement of the new Vimpelcom-10 Eurobonds, which rose to
101.00 yesterday.
The long Gazprom Eurobonds saw active demand yesterday. For instance,
there appeared a major buyer in the Gazprom-13 by the market close, with
some $100 bn worth of these papers seen bought at 120.75-121.125 on
broker screens.
Since the beginning of the year, we have been recommending that
investors hold mainly unhedged long positions in Russian Eurobonds,
expecting a considerable Russian country spread narrowing against stable
US Treasuries. However, with US Treasury yields already sharply lower,
and our expectations of considerable Russia’s country spread narrowing
remaining in place, we recommend that investors maintain long positions in
Russian Eurobonds but hedge a part of their position through shorting US
Treasuries, as the risk of UST yield increases from these low levels has
augmented noticeably. In case of further UST yield decreases, we will be
recommending to hedge 100% of long positions in Russian Eurobonds with
short positions in UST.
LOCAL DEBT MARKET
Non-aggressive profit taking continued in the market yesterday amid
average trading activity. Most first-tier issues lost another 0.1-0.5%, while
the second tier was mixed in choppy trading. Investor activity in the OFZ
sector was low. The most actively traded was the OFZ 25058; some RUB
70 mn worth of the bond changed hands, while its price was up 0.1%.
Other issues were mixed, changed by no more than 0.05-0.15%. The long
OFZ yield curve increased by 3 bp to 7.47-7.91% annualized. In the
Moscow municipal sector, the short-dated Moscow-24 was the leader in
turnover, having added 0.1%, while most other issues shed 0.1-0.2%. The
longest Moscow-39 spread over OFZ remained at 17 bp. Among corporate
blue chips, the leaders in turnover were the short-dated Alrosa bonds
(traded at a spread of some 190-200 bp over OFZs) and the Gazprom-5,
which lost 0.2%. In the second tier, there were no apparent leaders or
outsiders, with the Mechel Trading House rather weak (-0.3 %), probably
because of a practically identical Mechel Group issue’s entry to the
secondary market. It is worth noting that a prolonged “technical” pause with
bonds’ entries in the secondary market is coming to an end. The market is
to see a significant supply of first-tier issues quite soon, including the
already placed bonds of Lukoil, Russian Railways, Federal Grid Company,
and the future 4th Gazprom issue, which, in the absence of significant
fundamental as well as speculative growth potential, may cause more
aggressive profit taking in the first tier.