Fixed Income Daily: We remain bullish on the Russian sovereign spread and corps

EXTERNAL DEBT MARKET
Market strength at the open (with the Russia-30 near 106.125) gave way to
a serious price slump by the end of the day yesterday and further
weakness this morning. The sell-off was catalyzed by sharp yield increases
in US Treasuries. UST weakness was caused by a number of factors,
including a sharply weaker US dollar in the global market and Japan’s
statement that it might diversify its gold and FX reserves, decreasing the
share of US dollars. This means that Japanese demand for US Treasuries
may diminish in the long term. As a result, the 10Y UST yield penetrated an
important technical level of 4.40% yesterday, rising from 4.38%, and
continued sharply higher to 4.53%.
Against this background, Russian Eurobonds saw a noticeable decline
yesterday, although the country spread still remained near its record low.
The Russia-30 fell to 104.875 by the market close in Moscow yesterday
and further to 104.00 this morning. The spread of the Russia-30 over the
10Y UST has widened to 185 bp today from 180 bp yesterday.
Meanwhile, we should note that Russian corporate Eurobonds perform
better than Sovereigns in the bear market, and corporate yield spreads
over Sovereigns continue narrowing.
LOCAL DEBT MARKET
The market practically failed to notice ruble strengthening by another 10
kopecks yesterday, with most bonds mixed amidst average trading activity.
Today, the US dollar has lost 10 kopecks more and already reached 27.46
RUB/USD, which should provide quite good support for the first tier. In the
government bond sector, only the OFZ 46017 saw relatively active dealing
yesterday, its yield unchanged at 8.25%. Trading in other issues was
sporadic.
In the Moscow municipal sector, the Moscow-37 was the leader, up 0.1%.
The rest of the issues were mixed (+/-0.1%) against minimal turnover.
In the corporate first tier, purchases prevailed, with prices up no more than
0.1 %. There were no significant movements in the second tier, nor
apparent leaders or outsiders there.
The primary market is beginning to return to life (mainly due to the
publication of plans of new second- and third-tier placements), which
represents some threat for second-tier issues in the secondary market in a
slightly longer term. Despite the fact that the term of “freezing” after
placement is going to be reduced from two months to the formerly usual
one month, we do not expect future issues to follow the destiny of the
recently placed North-West Telecom and Russian Standard bonds, sold
practically at a discount to the secondary market. These bonds’ credit
quality is to remain considerably higher than that of the majority of future
primary market issues in the near term. Investors are going to anticipate a
premium, which may cause profit taking in the secondary market.