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February 17, 2005
Raiffeisen Bank Daily Market Monitor: The main event on the rouble bond market on Wednesday was Gazprom’s placement of a new bond issue, which saw demand far outstrip supply
Description
The main event on the rouble bond market on Wednesday was Gazprom’s placement of a new bond issue, which saw demand far outstrip supply. The gas monopoly placed Rub 5 bln. 5-year bonds at par with an 8.22% semi-annual coupon. The borrowed funds will be allocated for capital investment programs and short-term debt replacement. Gazprom announced that demand amounted to Rub 10.3 bln, or twice supply. However, other Gazprom rouble bonds suffered a decline in the range 0.1 to 0.3%. The rest of the market remained neutral. The Russian Eurobond market followed benchmarks exactly on Wednesday. The sovereign spread remained unchanged at 191 bps. The UST price declined after U.S. Federal Reserve Chairman Alan Greenspan’s testimony resulted in a yield increase (UST’10 yield increase 6bps to 4.16 bps) which translated into Russian papers: The Russia’30 yield increased exactly the same amount to 6.16%. We expect benchmarks to remain the main driver for the Russian market in the coming days.
VTB Capital Fixed Income Comment: Across the corporates and banking sector eurobonds, the longer duration more liquid credits were weaker in line with the sovereign
Description
Russian eurobonds closed lower over the day as EM debt suffered from the weaker UST market and Russia’s EMBI+ index declined by almost 0.1% with the spread widening marginally to 291 bps. In response to the release of Greenspan’s all important testimony to the Senate Banking Committee, 10-year UST yields spiked briefly, up 6 bps to reach 4.16% before consolidating around the 4.15% level, as the market digested the comments regarding the trajectory of long-term rates. Against a backdrop of rising interest rates the testimony discussed the viability of the current ‘curve flattening’ trend and highlighted the ‘broadly unanticipated behaviour of world bond markets as a conundrum’ and that ‘bond price movements may be a short-term aberration’. While many reasons were implied for this irregularity, no clear answer was provided. As a result of these moves Russia was lower bid and the benchmark RU30 traded from an opening level of 1069/16 to a low of 1061/16 in London before closing in New York at 1065/16. With the move in RU30 yields largely tracking UST yields, the respective spread over the 10-year note was broadly unchanged over the day at around +201 bps. Although volumes improved from the previous day, the underlying level was still moderate and the remainder of the curve witnessed few trades. Across the corporates and banking sector eurobonds, the longer duration more liquid credits were weaker in line with the sovereign. The remainder of the testimony was broadly in line with expectations, steady economic fundamentals, relatively low inflation pressures and long-term challenges to social costs. Nevertheless, in our view the above comments indicate that the Fed is unlikely to deviate from its ‘measured’ path and that yields remain upward bound, albeit characterised by pockets of resistance and retracement at key technical levels. Moreover, Greenspan reaffirmed the historical tightness of current EM spread levels, and this in itself remains a notable caveat. With UST slightly firmer today, Russia has opened with RU30 in a 1061/4-5/16 range (+200 to +199 bps over UST) and with a similar tone expected from today’s testimony before congress, the focus remains on the release of jobless claims, import prices, Philly Fed and leading indicators. Following Greenspan’s ongoing references to the ‘somewhat quickened pace of US import prices’ and the opinion that the market is awaiting some form of inflation shock to push yields higher, this price gauge will be of particular importance. At the same time, last week’s jobless claims posted its lowest level in over four years and another below trend (4-week MA) outcome is expected to provide support for current price levels.
February 16, 2005
Alfa Bank Fixed Income Market Weekly: CBR to lower reserve requirements for non-residents’ securities operations
Description
At the beginning of the week, Russian Eurobonds may depreciate by up to 0.6% following a technical correction on the US bond market. Several important events are expected in the US in the second half of the week, including Alan Greenspan’s appearance before the Senate on February 16 and the publication of US inflation data on February 17.
VTB Capital Fixed Income Comment: We anticipate this somewhat nervous tone to prevail throughout the morning
Description
Given the recent rally across most EM benchmark credits, trading activity yesterday was once again undertaken with extreme caution ahead of today’s allimportant Greenspan testimony. Volumes were low and few trades actually occurred with Russian eurobonds closing slightly lower in line with a weaker UST market. That is, the impact of yesterday’s key US economic data, retail sales and TIC data being in line with lower market expectations, was largely neutral and UST closed with a slight downward bias. At the long-end of Russia’s sovereign curve, the benchmark RU30 traded in an extremely narrow range and moved from an opening level of 10611/16 to close slightly lower at 1069/16, with the RU30 spread over 10-year UST yields remaining relatively flat at around 200 bps. Given that the MinFin and ARIES curves were relatively inactive the remaining focus centred on S&P’s latest report on Russia, and the growing differential between sovereign and country risk. While the impact of the report was largely contained, the reference to ‘the likelihood of further upgrades is tempered by governance risk’ led to certain pressures and the Gazprom credits underperformed. Russia has opened today with RU30 trading at similar levels to yesterday’s close, at 1069/16 with the spread slightly wider at +202 bps, and we anticipate this somewhat nervous tone to prevail throughout the morning. The market focus remains firmly entrenched on Greenspan’s semi-annual (Humprey-Hawkins) testimony today, and a general optimistic assessment on growth prospects and inflation expectations is expected. Nevertheless, in consideration of Greenspan’s more upbeat comments on the sustainability of the US current account deficit (4 February, London) today’s testimony may exhibit a slightly more hawkish tone. While on balance we expect the rhetoric to remain consistent with a gradual tightening and a move closer towards the ‘neutral rate’, with 10-year UST yields currently under 4.10%, in our view the mid-curve has not fully priced in the impact of this move. As such, risks remains on the upside, particularly given the underlying level of short positioning in the market. At the same time, it is important to note that previous warnings by Greenspan have been largely dispelled since his reference to tight credit spreads in Frankfurt (November 2004) and the EMBI+ spread has tightened by 25 bps during this period. Any reiteration of this stance is likely to put pressure on the more vulnerable EM credits and profit-taking may occur. In the absence of any positive domestic newsflow we continue to view Russian remaining resilient and envisage a further tightening in the RU30 spread, albeit the product of higher 10- year UST yields.
February 15, 2005
VTB Capital Fixed Income Comment: Russian eurobonds suffered from a lacklustre environment yesterday
Description
Russian eurobonds suffered from a lacklustre environment yesterday as most EM benchmark issues traded in extremely narrow ranges. As a result of such moves, Russia’s EMBI+ index posted a marginal gain with the spread consolidating at the +190 bps level. At the long end of the curve relatively few trades occurred and the benchmark RU30 traded in a 1/8 range, opening at 1063/4 and moving higher to 1067/8 before closing unchanged over the day. Against a backdrop of declining UST yields, albeit largely influenced by continuing ‘curve flattening’ trades, the RU30 spread over the 10-year UST note widened marginally from 200 bps to 202 bps. Elsewhere in Russia, trading across the remaining segment of the sovereign curve, MinFin and ARIES curves was inactive and prices were relatively flat. With regards to Russian corporate and banking sector credits, few trades actually occurred and most prices were marked accordingly in line with the sovereign. Yesterday’s somewhat ‘holiday’ mood sent a clear signal of the importance of Greenspan’s semi-annual (Humprey-Hawkins) testimony (Wednesday), as most market participants remain hesitant to undertake large positioning for fear of any shift in Fed rhetoric. Indeed, the market focus remains firmly entrenched on the anticipated content of the speech and will watch for any indication or insight into a likely modification on its current ‘measured’ pledge and the risk assessment on inflation. While we expect no significant surprise in the content of tomorrow’s presentation, EM debt remains vulnerable to any sell-off in UST and as such the upside for price gains remains limited. Still, the apparent abundance of global liquidity fuelling EM inflows suggests that any retracement from current levels is likely to be met with renewed buying interest, and from this viewpoint we expect further spread compression relative to the UST curve and see +190 bps as the short-term target for RU30 spread. With UST slightly firmer this morning Russia has opened with RU30 being quoted in a 1065/8-13/16 range (+202 to +199 bps over UST) and UST movements are expected to dominate trading patterns again today. On the data front, the release of retail sales, business inventories and December’s net foreign security purchases will remain the focus. The latter is expected to show a marked decline from the previous month, as indicated by the relatively low level of indirect bid participation in the UST auctions during the reporting period.
Alfa Bank Non-Government Ruble Bond Market Weekly
Description
The key event for the market this week will be the placement of Gazprom-4 in the amount of R5 bln. We do not expect the results of the auction to provoke serious price changes in the Corporate Alfa Index. However, a part of unsatisfied demand may pour into the market, thereby adding liquidity to secondary trading. Moscow and “blue chips” will be the first to gain from the reallocation of the auction funds. However, we suppose that investors will remain focused on 2nd tier, which is likely to be the favourite in the medium-term.
February 14, 2005
VTB Capital Fixed Income Comment: Activity across the corporate and banking sector bonds was relatively subdued with prices generally lower bid in line with the sovereign
Description
Russian eurobonds underperformed the wider EM debt market on Friday with Russia’s EMBI+ index easing 0.16% over the day compared to a marginal gain in the overall EMBI+ index. Volumes remained relatively low and activity was confined to the more liquid credits as the benchmark RU30 traded in a 1/4 point range throughout the day, opening at around 1063/4 and closing in London at 1067/8. With the move in RU30 largely in line with UST, the RU30 spread over the 10-year UST note tightened marginally from 202 bps at opening to 199 bps at close. Elsewhere at the long end of the sovereign curve, selling pressures were evident across RU28 and the bond traded lower from 1721/2 to 1723/8, with the spread over RU30 widening from 51 bps to 54 bps. Similarly, the ARIES ’14 also suffered and traded lower to 1255/8, albeit with the spread over RU30 unchanged at -1 bps and within its recent -2 to +2 trading range. As a result of these moves the Russian EMBI+ spread widened marginally and led to an overall tightening of 7 bps over the past week. At the same time, the compression in spread levels towards Mexico’s sovereign credit curve continues at pace, and Russia’s EMBI+ spread tightened 6 bps over the week to +34 bps. Activity across the corporate and banking sector bonds was relatively subdued with prices generally lower bid in line with the sovereign, and the more liquid Gazprom credits suffered most. With UST slightly lower this morning Russia has opened with RU30 being quoted in a 10611/16-13/16 range (+200 to +199 bps over UST) and we expect prices to trade cautiously ahead of this week’s eventful US economic calendar. That is, following last week’s refunding auctions the market focus returns to the release of January macro data, including retail sales (Tuesday), housing starts and industrial production (Wednesday), jobless claims, import prices and leading indicators (Thursday) and PPI (Friday). More importantly, Fed Chairman Greenspan presents the Fed’s semi-annual (Humprey-Hawkins) testimony on Wednesday and the market will watch closely for any signal regarding an end to its ‘measured’ pledge and assessment on inflation. While inflation expectations are expected to remain ‘contained’, the focus is likely to remain on any comments referring to the slowdown in productivity growth and its impact on prices. In consideration of any shift in sentiment towards to the US interest rate outlook, EM debt continues to remain vulnerable to any short-term sell-off, particularly at such historically tight price levels. Nevertheless, we expect Russia to remain in favour, with the outlook for debt prices supported by President Putin’s latest comments underlining the country’s commitment to repay its foreign debt ahead of schedule and expect the long end to outperform the short end.
B&N Bank Fixed Income Daily: The leaders of the fall among Russian corporate Eurobonds were the long Gazprom papers against the background of the Gazprom-Rosneft merger complications
Description
EXTERNAL DEBT MARKET The US Treasury yields rose at the end of the last week on very low initial jobless claims, and also against the beginning of the US dollar’s noticeable decline vis-а-vis the euro and the yen. The 10Y UST yield rose to 4.10% by the end of the week from 3.98% in the middle of the week. Against this backdrop, Russian Eurobonds followed US Treasuries on their way down. Meanwhile, the Russian spread remained at its minimum level achieved. The Russia-30, having topped at a new record high of 107.5625 in the middle of the week (a spread of 198 bp), eased to 106.625-106.750 by the end of week (a spread of 202 bp). The leaders of the fall among Russian corporate Eurobonds were the long Gazprom papers against the background of the Gazprom-Rosneft merger complications. This week, investors are waiting for the Fed Chairman’s semi-annual testimony on economy and monetary policy before the US Senate Bank Committee (on February 16). In his speech, Alan Greenspan may express his view of economic growth and, most important, may outline the prospects of further interest rate hikes in the US. The US bond market and emerging bond markets are thus likely to remain in a sideways trend till that moment. LOCAL DEBT MARKET The market’s reaction to ruble strengthening on Friday was rather weak. Trading was dull, with prices mainly just marked up or down. Most first-tier issues inched down on low turnover, with selective buying prevailing in the second tier. In the government bond sector, only the OFZ 46104 saw relatively active dealing, while its price remained almost unchanged. The yield curve of long issues remained at 7.48%-7.96%. In the Moscow municipal sector, the short-dated Moscow-24 was the leader in turnover, adding 0.3%. The rest of the issues were mixed on minimal turnover. The leader of growth was the longest Moscow-39, which added 0.1%; some RUB 22 mn of the bond changed hands, while its yield spread over the OFZ 46014 narrowed to 5 bp. Minimal yield spreads of long-dated issues over OFZs make them very vulnerable to any deterioration of market conditions. In corporate blue chips, only the Gazprom bonds were traded relatively actively and closed unchanged. In the second tier, worth noting is continued uptrend in the WBD-01, the SouthTelecom-3, the Mechel Trading House and the Mechel Steel Group, which look “better” than the market.
Raiffeisen Bank Daily Market Monitor: We see these levels as being supportive of Russian assets in the coming days, but the mid-term prospects for Russian Eurobonds do not look so rosy
Description
BOND MARKET The rouble bond market saw little change on Friday, but expected rouble appreciation should provide support for rouble papers this week. The major event will be the placement of a 5-year Rub 5 bln. bond issue by Gazprom on Wednesday. The same day, the finance ministry is planning to place Rub 10 bln of its OFZ 46017, maturing in 11 1/2 years. The auctions’ outcome should determine market dynamics and sentiment in the short term. The Russian Eurobond market was again at the mercy of benchmarks on Friday, the UST’10 yield increasing 2 bps to reach 4.1%, at which point it found support. The most liquid Russia’30 bond yield also increased 2 bps to reach 6.09%. Meanwhile, the sovereign spread contracted 3 bps to 190 bps. We see these levels as being supportive of Russian assets in the coming days, but the mid-term prospects for Russian Eurobonds do not look so rosy.
February 11, 2005
VTB Capital Fixed Income Comment: News that Russia will not allow foreign companies to bid for some of the nation’s largest natural reserves deposits has yet to be digested by the markets
Description
The market followed UST to trade down from recent highs, however with recent data releases swinging sentiment toward a further tightening of US rates, attention will focus on Greenspan’s economic testimony next Wednesday. Although volumes in Russian paper remained low, spreads moved toward 202 over UST on a day of selling. News that Russia will not allow foreign companies to bid for some of the nation’s largest natural reserves deposits has yet to be digested by the markets. Although such restrictions are common in other commodity exporting countries, some commentators interpreted the more as a further nationalistic stance by the authorities. The new regulation states that only companies that are at least 51% Russian-owned will be allowed to participate in auctions for exploration and development licenses. The restriction may significantly complicate the work of many oil and gas and mining companies that work either in joint-ventures or through foreign entities. The new code may also constrain international investors activity in Russian, or as may be the authorities intention it may force FDI into forms more common in OPEC economies. While the market apparently reacted positively on Severstal’s acquisition of Lucchini, the announced change by Fitch Ratings of outlook for Mastercroft Ltd, a holding company for EvrazGroup, from Stable to Positive did not significantly move the market. In the meantime non-consolidated financial results the group published earlier in the week showed strong performance of the group and assured of positive results in 2005. The conflict situation over Vymplecom’s tax arrears is likely to be solved, though the company has yet to receive the 2002 tax claims. Still the reported payment of US$17.5 million of 2001 taxes and fines (a sum much smaller than previously claimed) showed its ability to negotiate with tax authorities and lifts any concerns over political background of the conflict.
B&N Bank Fixed Income Daily: UST treasuries off their recent highs. We expect them to continue to trend lower.
Description
EXTERNAL DEBT MARKET Strong US labor market data published yesterday, with initial jobless claims considerably below expectations, and low demand at the 10Y US Treasury auction (with demand exceeding supply twice, compared to 2.7 times at the previous auction in December 2004) drove the 10Y UST yield up from its 4- month low to 4.06-4.07%. As a result, Russian Eurobonds lost 0.25-0.75%. The Russia-30 fell to 100.875 by yesterday’s evening. Its spread widened to 205 bp. This morning, the price was as low as 106.625, but stabilized at 106.750- 106.875 by midday. The spread eased to some 200-201 bp. 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 The market was mixed in rather dull trading. There were no considerable market movements yesterday. Most first-tier issues inched up 0.1-0.2%, while the second tier was mixed with selective deals prevailing. In the government bond sector, only the OFZ 46104 saw rather lively dealing, with its yield almost reaching 8%, while the majority of other issues were marked down 0.1-0.15% on minimal turnover. The long OFZ yield curve increased by 5 bp to 7.48-7.96% annualized. In Moscow municipals, most turnover was concentrated in the two issues: the short Moscow-24 (-0.2%) and the long Moscow-38 (+0.1%). Overall, the sector yields remained essentially unchanged, while the yield spreads of long-dated issues over OFZ remained minimal. The latter fact renders the bonds of the sector very vulnerable to any deterioration of market conditions. In corporate blue chips, the leader in turnover remained the Gazprom-5, whose price fluctuated within +/-0.2%, while investor activity in other issues remains low.
Raiffeisen Bank Daily Market Monitor: We expect this downward correction to continue on Friday
Description
The rouble bond market saw some consolidation on Thursday although a lack of trading ideas left the market nearly unchanged. Traders appear to be waiting for more certainty from the money markets before making any significant changes to their portfolios. We see rouble appreciation as the most likely scenario, which we see as having a positive influence on rouble bonds. The Russian Eurobond market mostly followed U.S. benchmarks on Thursday. U.S. treasury bonds saw a significant decline after the release of stronger than expected U.S. economic figures and significant technical pressure after over-buying the day before. The market benchmark UST’10 bond yield climbed about 10bps, which led to a price decline in Russian papers – the most liquid Russia’30 bond lost about 0.5% in price to hit 106.8%. We expect this downward correction to continue on Friday.
February 10, 2005
Fitch Ratings Reform of Social Benefits in Russia: Regional Disparities May Increase
Description
The reform of social benefits in Russia, which was launched at the beginning of the year, could lead to upward pressure on expenditure in some regions and so to a reduction in much-needed capital spending. The main aim of the reform, which has led to protests in some regions, is to improve the financial position of publicly-owned companies by replacing concessionary pricing with cash allowances paid directly to identified social groups. It also aims to increase the transparency of financial flows between the regional authorities and their publiclyowned companies. However, the reform may place an additional burden on regional budgets, as the regional authorities are currently responsible for providing the cash allowances.
B&N Bank Fixed Income Daily: However, against the background of US Treasury growth, normal profit taking began in Russian Eurobonds
Description
EXTERNAL DEBT MARKET The yields of US Treasuries continue falling, contrary to most expectations. Moderate US labor market growth and inflation under control yet more incline investors and Fed directors in favor of slower interest rate increases this year than anticipated at the beginning of the year. As a result, the 10Y UST yield fell to 3.98% yesterday, reaching a new low since late October 2004. Weak US equities also prompted more demand for US Treasuries. However, against the background of US Treasury growth, normal profit taking began in Russian Eurobonds. The Russia-30 fell to 107.3125 (a spread of 199 bp) by the end of trading in London, and has already eased to 107.000 today (a spread of 203 bp). 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 The market saw no considerable movement yesterday amid average trading activity. Most first-tier issues inched up 0.1-0.2%, while the second tier was mixed with selective deals prevailing. In the government bond sector, investors focused on the OFZ 27026 reopening auction, while investor activity in other papers remained minimal. Most issues lost 0.05-0.15%. The yield curve increased to 7.43-7.92% annualized. Among Moscow municipals, the Moscow-31 and -41 were traded the most actively and saw several large transactions. The sector as a whole was mixed, with prices up or down 0.1-0.2% in dull trading. The longest Moscow-39 spread over OFZ narrowed by 5 bp to 12 bp. In corporate blue chips, the leaders in turnover were the Gazprom-5 and the Lukoil-2 bonds, which added 0.2%, while overall yields in the sector remained essentially unchanged. In the second tier, worth mentioning is negative performance of Dalsvyaz bonds, which lost 0.4% on tax claims to the company for 2001-2002.
VTB Capital Fixed Income Comment: The recent rally in EM debt paused yesterday and Russian eurobonds were relatively flat with the benchmark issue closing off its recent highs
Description
The recent rally in EM debt paused yesterday and Russian eurobonds were relatively flat with the benchmark issue closing off its recent highs. Amid relatively thin trading volumes, activity was largely confined to the long end of the curve and RU30 traded lower from an opening level of 1073/8 to close at 1075/16 . Despite a brief spike in UST yields following comments from the Fed’s Guynn, the downward move continued and with 10-year UST yields declining to below 4% for the first time since October, the RU30 spread widened from 198 bps to 201 bps. Demand for RU28 was evident as the bond traded higher to 1741/8, albeit largely influenced by continuing spread related moves which led to the RU28 spread over RU30 tightening to 51 bps, a level not witnessed since August 2004. With the RU28 spread breaking through its 6-month range of 55-60 bps in recent trading sessions, the key test remains whether the spread can hold at such levels. The short-end of the curve also witnessed stronger bids and the RU07 outperformed its peers with the spread over 2-year UST tightening to a record 87 bps. In response to the moves in the sovereign curve, the Russian EMBI+ index posted a marginal gain and underperformed the overall EM curve with the spread widening 5 bps to 195 bps. Elsewhere in Russia, the MinFin and ARIES curves were offered accordingly, and the more liquid ARIES ’14 traded lower to 1261/8 with the spread over RU30 relatively unchanged at -1 bp. The performance of both corporate and banking sector eurobonds was relatively mixed and the Vimpelcom ’09, Severstal ’14 and MMK ’08 credits outperformed. With UST slightly weaker this morning, RU30 has opened in a 1071/16 -3/8 range (+205 bps to + 202 bps over UST) and with 10-year UST yield currently below 4% the global search for ‘yield’ is expected to provide support and we continue to view Russia’s underlying credit attractiveness as offering value. At the same time, current price levels are supported by the extremely short supply of longer dated EM debt paper and anticipate RU30 spread to retest the +200 bps level and compress further towards Mexico’s sovereign credit curve. While US trade balance, jobless claims and January’s budget statement data are all released today, the US$14 billion auction of 10-year UST notes will also be of significance. In particular, following the success of this week’s 3-year and 5-year auctions (bid/cover ration of 2.53% and indirect bid of 45%), the level of indirect bids will remain the focus given that real 10-year yields are currently at around 0.7%. That is, will such levels of real rates offer sufficient compensation to offset the FX risk.
Raiffeisen Bank Daily Market Monitor: We believe that the Eurobond market, particularly the Russian segment, is technically overbought now
Description
On Wednesday the Rouble bond market seemed to suffer from a lack of trading ideas against a backdrop of uncertainty about exchangerate dynamics. Trading in the first echelon was inactive, while the second echelon of high credit quality, particularly Sun Interbrew, Baltika and bonds of metal producers enjoyed higher demand. We believe players will remain restrained from active trading until the uncertainty on the exchange-rate side resolves itself. The Russian Eurobond market demonstrated little change despite significant moves in benchmarks. The announcement by a FOMC representative of potential changes in the wording of FOMC’s next statement (reflecting the changes in the body’s assessment of U.S. economic development) unexpectedly induced growth in the UST. The traditional benchmark UST’10 yield slipped 6 bps to 3.98%, breaking through the psychological 4% level. The Emerging markets failed to keep pace with benchmarks, with the EMBI Russian sovereign spread increasing 6 bps to 196 bps. We believe that the Eurobond market, particularly the Russian segment, is technically overbought now, so that any negative news could provoke major downward correction. At the same time all expected positive factors are already in place, so there is no upside potential from this side in our view. We believe that closing long positions and going short would be the most reasonable tactic now for the Russian Eurobond market. Meanwhile, the release of several important sets of U.S. economic figures is expected today: The December trade balance (deficit expected to be $57 bln), jobless claim statistics and the January budget statement (a figure of $10 bln is expected). We believe the actual figures could significantly influence the Eurobond market through the benchmarks.
February 09, 2005
B&N Bank Fixed Income Daily: The leaders of growth among Russian corporate Eurobonds were the Vimpelcom papers
Description
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.
VTB Capital Fixed Income Comment: With Russia continuing to outperform its EM peers, the spread over Mexico’s EMBI+ closed 4 bps tighter at 33 bps
Description
Both continuing scarcity of EM paper and a firmer UST market provided further buying impetus for the market yesterday and Russian eurobonds traded to new highs. Although volumes were somewhat lower than recent trading sessions, the longer duration credits were clearly in demand and the sovereign curve continued its flattening trend. The benchmark RU30 traded from an opening level of 1071/16 to reach a new all-time high of 1079/16 in New York and closed slightly off the day’s high at 1077/16. Nevertheless, the decline in RU30 yields, down from 6.05% to 5.99% (at the day’s high trade), was largely offset by 10- year UST yields compressing further towards the 4.0% level and the respective RU30 spread was rangebound and closed at +198 bps. RU28 also traded higher and reached 174 intra-day, with the spread over RU30 tightening through its month 55-60 bps range to +52 bps. Still, RU28 remains around 4 points off the all-time high of 178, reached in mid-June 2003. In response to the moves in the sovereign curve, Russia’s EMBI+ index increased further, up 0.38% over the day, and remains 4.3% higher on a YTD basis. At the same time, Russia’s EMBI+ spread tightened by a further 3 bps to a record 190 bps. With Russia continuing to outperform its EM peers, the spread over Mexico’s EMBI+ closed bps tighter at 33 bps, and as such has contracted by around 17 bps since the beginning of the year. Amid relatively few trades occurring in the MinFin and ARIES issues, both curves were marked accordingly and the ARIES ’14 spread over RU30 was relatively unchanged. While elements of profit-taking occurred across a number of corporate and banking sector credits. In contrast, large volumes were witnessed in the Gazprom curve owing to a technical move involving a series of CDS transactions being executed and the resultant late buying lifted the longer duration credits with the ’13 issue outperforming. With UST slightly weaker this morning, RU30 has opened in a 1077/16 -3/8 range (+198 bps over UST) and in view of recent trading patterns it appears that the lack of paper and ongoing ‘search for yield’ will continue to support current price levels. The US economic calendar is once again vacant of any significant data releases, and with yesterday’s US$22 billion auction of 3-year UST notes proving moderately successful (indirect bids 44% and bid/cover ratio 2.01) the focus remains on today’s US$15 billion auction of 5-year UST notes.
Raiffeisen Bank Daily Market Monitor: We believe that the current levels are quite high and we do not exclude a trend reversal soon
Description
The rouble bond market saw consolidation on Tuesday following dollar strengthening against the rouble. First echelon papers saw tiny losses, while some second echelon papers of high credit quality even finished the day in positive territory. Investors seem unwilling to reduce their portfolios at current levels, which seems to point to positive expectations. After all, rouble liquidity remains favourable, while exchange rate dynamics could reverse soon following pressure from fundamental factors – export revenue inflow and the government’s inflation target. At the same time, we do not see significant upside potential in this direction now, so our outlook on the rouble bond market remains neutral. We expect that the next significant development will be a bond placement from Gazprom on February 16. Meanwhile the finance ministry plans to conduct an additional placement of OFZ 27026 (maturing in 2009) for Rub 5 bln on Wednesday. Russia’s Eurobond market followed global dynamics, remaining slightly positive on the back of a strong dollar. Meanwhile, the Russian sovereign spread contracted 4 bps to reach 190 bps. We believe that the current levels are quite high and we do not exclude a trend reversal soon.
February 08, 2005
Alfa Bank Fixed Income Market Weekly: After the S&P upgrade, Russian’s debt’s sensitivity to the price dynamics of US Treasuries rose sharply
Description
Eurobond market At the beginning of the week, Russia-30’s spread against US Treasuries may reach a level of 200 bpts. A decline in Russian eurobond prices is likely starting from Wednesday in response to the movement of US federal debt after the large auctions of US Treasuries.
B&N Bank Russian Eurobond Spreads over US Treasuries: The Game Is Not Over… The Show Must Go On…
Description
Russia has finally obtained full investment rating, after S&P, following Moody’s and Fitch, upgraded the country’s rating to an investment grade early last week. A longexpected event has taken place. On the expectations and the fact of investment rating assignment to Russia by S&P, Russian Eurobond spreads over US Treasuries have narrowed by approximately 20- 25 bp over the last three weeks. However, even after considerable narrowing of the Russian country spread over the last three weeks, as well as over the last 3-6 months, there remains significant further spread narrowing potential. We have compared Russian Eurobond spreads to these of several categories of “ВВВ-“ and “ВВ+”-rated liabilities. Russian Eurobonds are still being traded at wider spreads over US Treasuries than US corporate bonds, even those rated speculative “ВВ+” !!! The spreads of long “ВВ+”-rated bond (comparable with the Russia-30 in duration) are now 190 bp. Meanwhile, the spreads of long “BВВ-”-rated bonds (comparable with the Russia-30 in duration) are now 150-160 bp. The Russia-30 spread over US Treasuries is now 210 bp. We estimate further Russian Eurobond spread narrowing potential to be at least 20 bp in the short term (we expect the Russian spread to reach and then become narrower than that of “BB+”-rated US corporates), and we expect the spread to narrow by 40-50 bp in the medium term within the frame of Russia’s current credit rating. We also deem it possible that Moody\'s and Fitch will raise Russia’s rating by another degree after Russia has agreed the conditions of early redemption of its debt to the Paris Club. This would create preconditions for further Russian country spread narrowing. According to all its debt and budgetary parameters, Russia now already meets the criteria of an “A”-rated country (3 grades above the current level). Meanwhile, further rating upgrades are prevented by political reasons. For more details, see our strategy in the debt market for 2005. We do not rule out that Russia’s country spread may present investors with a nice surprise over the next one or two years by narrowing faster than Russia’s credit rating is going to be upgraded. We expect the Russia-30 spread over US Treasuries to be in the range of 150-170 by the end of 2005.
B&N Bank Fixed Income Daily: Long Russian corporate Eurobonds saw substantial price increases yesterday
Description
R30\'s enjoyed a strong rally yesterday largely on the back of the UST market. Some people seem to attribute the UST\'s strength to President Bush\'s tight budget. I would not bet on it. While there is broad political support in the US to rein in the deficit, there are considerable differences of opinion of how and where to do it. Treasuries will weaken as these differences become more clear and as the difficulty of the task becomes more apparent. Corporate credits continue to be well bid as the sucessful Vimpelcom deal clearly shows. Steels look cheap. Sistema IPO may bring less than hoped but it is still a good as far as bond holders are concerned. EXTERNAL DEBT MARKET The yields of long US bonds continued falling, with the yields of short-dated bonds increasing. Following the favorable labor market data published on Friday, another positive for US Treasuries yesterday became Bush’s budget. The US President announced his plan to decrease the US budget deficit twice over the next three years (to 1.7% of GDP) by cutting budget expenditures on 150 State programs. Furthermore, sharp USD strengthening in the global market prompted more interest in USDdenominated assets, including US Treasuries. As a result, the 10Y UST yield was as low as 4.04% yesterday, while the 2Y UST yield remained at 3.30%, which caused the 10Y UST yield spread over the 2Y UST to narrow to 74 bp. Consequently, higher US Treasury prices and a new contraction of the Russian spread resulted in a sharp surge of Russian Eurobond prices yesterday. The Russia-30 soared to 107.1875, while its spread over UST easily penetrated 200 bp and consolidated at 197-198 bp. Today, the Russia-30 has remained steady at 107.000-107.125. We expect the Russian spread to narrow by at least another 20-30 bp over the next few months. We do not anticipate the long US Treasuries to fall considerably and expect the 10Y UST yield to trend sideways in a range of 4.1-4.4% over the next two or three months. Long Russian corporate Eurobonds saw substantial price increases yesterday. While the long Gazprom papers traditionally followed the Sovereigns on their way up, the long Severstal Eurobonds increased considerably thanks to the emergence of aggressive demand for the highyield segment of the yield curve. LOCAL DEBT MARKET Substantial USD strengthening prompted profit taking in ruble bonds after the rally of the last week. Most first-tier issues decreased by 0.1-0.3% against the background of average trading volumes. The long OFZ yield curve increased by 1-2 bp to 7.45-7.88% for the day. Trading activity in the Moscow municipal sector was rather low, with mainly selective transactions taking place and prices down 0.1-0.5%. Corporate blue chips eased by 0.3- 0.5%. The outsiders were the Lukoil bonds, which, however, maintained a yield discount to the Gazprom due to the latter’s yield increase. The second tier was mixed against the backdrop of selective transactions. There are chances that speculative profit taking will continue today, with the greenback already up to 28.17-28.2 RUB/USD and January inflation in Russia in line with the most pessimistic expectations at 2.6%.
VTB Capital Fixed Income Comment: Russia remains somewhat resilient at present and we anticipate further spread compression
Description
A firmer UST market and apparent scarcity of paper across EM benchmark credits provided further support for the market yesterday and Russian eurobonds traded through their recent highs. The Russian EMBI+ index increased 0.83% over the day and outperformed its EM peers with the spread contracting to 193 bps, its tightest level to date. At the same time, the Russian EMBI+ spread tightened intra-day to 24 bps over Mexico’s sovereign curve, its tightest level since October 2003, before closing at +37 bps. In line with global trading patterns, Russia witnessed strong demand across the longer duration credits and the sovereign curve continued its flattening trend. The benchmark RU30 opened at 1063/8 and continued to trade higher throughout the day to reach a new all-time high of 1073/16 in New York. As a result of this move the RU30 yield declined 9 bps to 6.04% with the spread over 10-year UST tightening from 205 bps through the key 200 bps level to close at 199 bps. Similarly, RU28 witnessed strong demand and traded to a high of 1729/16, and with the yield falling 11 bps to its lowest level since June 2003 at 6.61%, the bond outperformed the long-end of the curve. Both MinFin and ARIES curves were also bid higher, with renewed demand for the ARIES ’14 resulting in the spread over RU30 tightening marginally to -3 bps. Russian corporate and banking sector eurobonds were generally firmer bid with the longer duration credits outperforming, namely Gazprom ’13 and ’34, Severstal ’09 and Vimpelcom ’11. With regards to the latter, any lingering concerns regarding the company\'s ongoing tax claims were soon dismissed following the successful placement of its US$300 million 5-year eurobond. In the absence of any roadshow the company clearly took advantage of current market conditions and the order book was estimated at US$2 billion. The Vimpelcom ’10 was issued at par (433 bps over 5-year UST) and traded higher to 1011/4-1/2. On a spread basis, the valuation represents the mid-point to current spread levels of the Vimpelcom ’09 and ’11 credits. Russia has opened this morning with the RU30 trading in a 107-1071/16 range (+199 to +198 bps over UST) and in the absence of any significant data releases, today’s focus remains on the US$22 billion auction of 3-year UST notes. Indeed, following the relatively disappointing level of indirect bids (foreign Central Bank buying) in recent auctions, the forthcoming UST treasury issuance will be followed closely. Given that the latest EM rally is in part UST driven, we continue to view the more vulnerable EM credits as exposed to any shift in sentiment. That said, Russia remains somewhat resilient at present and we anticipate further spread compression.
Raiffeisen Bank Daily Market Monitor: However we see no serious upside potential in the coming days
Description
The rouble bond market remained restrained on Monday following dollar appreciation against the rouble. Traders simply removed their bids, while not hurrying to sell off their portfolios, seemingly waiting for the exchange rate movement to reverse. We believe that current high price levels leave no upside potential in the coming days, although a significant downturn is not very likely either. The significant volatility of the exchange rate could bring a pause in active trading until the situation resolves. Meanwhile, Gazprom announced a new date for its 5-year Rub 5 bln bond issue – it will take place on February 16 (instead of February 8 as earlier planned). The Russian Eurobond market remained dormant Monday on positive speculative sentiment. The Russia’30 spread to benchmarks contracted 5 bps to 200 bps. However we see no serious upside potential in the coming days, as the most positive news that had been expected on the market has already happened (the sovereign rating upgrade, for example). Meanwhile, Russian borrowers continue borrowing on the Eurobond market while rates are low: Vimpelcom came to the market with a $300 mln seven-year issue priced at 8%, while Sberbank placed an additional $150 mln worth of 10-year bonds at 6.23% to increase the issue value to $1 bln ($850 mln were placed a day before).
February 07, 2005
B&N Bank Fixed Income Daily: Russian corporate Eurobonds saw healthy gains and added ј-5/8% on Friday
Description
EXTERNAL DEBT MARKET The long-expected US labor market data did not disappoint investors both in the bond and stock markets. Indeed, the labor market has been steadily growing, but at a moderate pace, which, on the one hand, confirms steady growth of the economy, while, on the other hand, does not give the US Fed grounds for aggressive interest rate hikes. Instead of the expected 200K new jobs in January, there were 146K new jobs created, while the revised December 2004 figures showed a 133K increase instead of the preliminary 157K. The data was interpreted positively by all market participants, and both the US stock and bond markets saw one of their strongest rallies over the last few months. The 10Y UST yield fell to 4.08% from 4.15% seen ahead of the data release. In fact, our expectations in relation to the US Treasury market are being so far justified – we expect the 10Y UST yield to be in the range of 4.1-4.4% over the next few months. This would positively affect the market of Russian Eurobonds, which should continue appreciating and narrowing their spreads over US Treasuries. It is possible that the yields of long US Treasuries will increase in 2005 less than we had expected (we expected the 10Y UST yield to reach 4.8-5% by the end of the year). Short-dated US Treasuries are likely to see more aggressive yield increases, which would flatten the yield curve. As a result, Russian Eurobonds rallied on Friday to new record highs. The Russia-30 increased to 106.25, while the Russia-28 rose to 170.625. Today, the rally has continued, with the Russia-30 having reached already 106.375-106.500 and is spread over US Treasuries having narrowed to new record low of 202 bp. We expect the spread to narrow to less than 200 bp in the near future and to reach 180 bp in several months. See more details in our desk note of February 4, 2005 “Russian Eurobond Spreads Over UST: the Game Is Not Over... The Show Must Go On.... Russian corporate Eurobonds saw healthy gains and added ј-5/8% on Friday. LOCAL DEBT MARKET Price growth prevailed in the market against the background of high trading volumes on Friday. The long OFZ yield curve declined by 5-7 bp to 7.44-7.86%, with prices up 0.05-0.15% across the sector. Most Moscow municipals appreciated by 0.15-0.2%, with the medium- and long-dated issues enjoying the greatest demand. The leader in turnover was the new Moscow-41 issue, which contributed approximately 60% to the total sector turnover (some RUB 4.7 bn). The longest Moscow-39 spread over OFZs widened to 12 bp due to faster OFZ 46014 yield decrease, while overall yield decreases in medium- and long-dated Moscow issues amounted to 3-8 bp. Among corporate blue chips, the leaders in turnover were the Gazprom bonds, which added 0.2- 0.3%. The beginning of trading in Lukoil bonds caused no surprises, with the yield remaining at the primary placement level of 7.38%. Apparently, effected primarily were transactions concluded on the “when and if” conditions. Huge demand of non-residents at the auction and maintained discount to the Gazprom (about 7-10 bp) renders doubtful the prospects of the issue’s liquidity increase in the absence of a 20-30 bp Gazprom yield decrease. The majority of the most liquid second-tier issues added some 0.2-0.3%. Practically all the telecom issues saw healthy demand, with the leader in turnover being the CenterTelecom-4, which added 0.4%.
VTB Capital Fixed Income Comment: Both longer duration banking and corporate credits benefited from the stronger sovereign performance, and on a price basis
Description
The below consensus US non-farm payroll (NFP) data proved supportive for both EM and Russian external debt on Friday, as the Russian EMBI+ index posted gains of around 0.6% with the spread slightly tighter at +198 bps. Similar to most benchmark EM credits, Russia witnessed strong demand post-data release across the longer duration issues and the sovereign curve flattened further. In response, the benchmark RU30 traded from an opening level of 1055/8 to reach a new all-time high of 1063/8 in New York before closing at a mid price of 1065/16. Despite 10-year UST yields falling to an intra-day low of 4.05%, the RU30 spread over UST tightened from +206 bps at opening to briefly trade through the psychological +200 bps level, closing relatively flat over the day at +205 bps. The RU30 spread over UST has contracted by around 12 bps over the past week and continues to tighten further towards the medium-term target of Mexico’s sovereign credit curve. Across Russia’s sovereign curve, RU28 traded to its highest level since June 2003, and at 1703/4 the respective spread over RU30 tightened marginally to 55 bps. While both MinFin and ARIES yield curve dynamics shifted accordingly, the ARIES ’14 traded higher at 1251/8 with the spread over RU30 narrowing to the tighter end of its recent +2 bps to -2bps trading range. Still, given Finance Minister Kudrin’s recent comments that Russia may suffer from its investment grade status in its search for a discount on early Paris Club debt repayments, we expect the ARIES credits to remain vulnerable to shifts in sentiment regarding the degree of success in the forthcoming negotiations. Both longer duration banking and corporate credits benefited from the stronger sovereign performance, and on a price basis, notable gains were registered across the VTB ’11, Sibneft ’09, Gazprom ’34 and Vimpelcom ’11 issues. Russia has opened this morning with the benchmark RU30 trading at 1067/16 (+204 bps over UST) and with the US economic calendar thin this week we expect profit-taking to occur at such tight levels. That said, the latest NFP data is unlikely to detract the Fed from its current monetary tightening bias and the market is likely to use this period to reassess the implications and sustainability of mid-curve UST yields retracing to almost 4% and its subsequent impact on EM debt. Looking ahead, and following comments from Fed Chairman Greenspan regarding import price pressures on Friday the focus over the next two weeks will return to the latest batch of US price data. While Russia will remain vulnerable to UST movements, EM inflows continue at pace and we expect Russia to benefit its investment grade status with the RU30 spread retesting the +200 level.
Raiffeisen Bank Daily Market Monitor: We believe that many positive factors for the Russian segment are already priced in, so we see no significant upside potential for Russian papers at present
Description
The mood on the Rouble bond market was optimistic on Friday, but we see the yields as having reached satiation point, and expect consolidation in the coming week. The market should calm down after last week’s auctions and heavy news flow. We believe that exchange rate dynamics could have significant influence on the current market: trend reassessments in the money market on the back of global FX market volatility could act as a trigger. The Russian Eurobond market remained relatively calm on the day. While no significant changes were seen in terms of spread to benchmarks, the latter demonstrated positive dynamics after weaker than expected US payroll figures released on Friday. We believe that many positive factors (that had been expected over a longer period) for the Russian segment are already priced in, so we see no significant upside potential for Russian papers at present.
February 04, 2005
VTB Capital Fixed Income Comment: Russian corporate and banking sector eurobonds were generally firmer
Description
Russian eurobonds moved higher yesterday influenced by reports that Russian remains committed to repay early its Paris Club debt and also the substantial rise in the country’s FX reserves position. In response to this positive news flow Russian EMBI+ index rose 0.25% and outperformed its EM peers with the spread trading through the 200 bps level to close at 198 bps, its tightest level to date. At the same time, Russia’s EMBI+ spread over Mexico’s sovereign credit curve, its perceived reference point, tightened to 34 bps in mid-session, a level not witnessed since October 2003. Amid reasonable volumes, yields across the longer duration credits declined and the sovereign curve flattened further. The benchmark RU30 opened at 1051/16 and traded to a new all-time high of 1055/8 before closing at 1059/16. Moreover, with the 10-year UST yield rising from 4.142% to 4.162%, the decline in RU30 yields led to the spread over UST contracting from 213 bps at opening to its tightest level of 204 bps, at the day’s high. While the other longer duration credits such as RU18 and RU28 were marked slightly higher, the latter spread over RU30 remains at the tighter end of its long-term 55-60 bps trading range. In contrast to recent selling pressures, the ARIES curve witnessed renewed buying and the more liquid ARIES ’14 outperformed, trading in a 12311/16 to 1243/8 range. As a result of this move, the ARIES ’14 spread over RU30 tightened from +6 bps to the mid-point of its recent +2 bps to -2bps trading range. Russian corporate and banking sector eurobonds were generally firmer bid with the industrial credits such as MMK, Severstal and ALROSA outperforming. Similarly, strong demand was evident in the MTS ’08 and Vimpelcom ’09 and ’11 issues. Russia has opened this morning with residual strength supporting prices and RU30 is trading in a 1051/2-5/8 range (+207 bps to +205 bps over UST). Nevertheless, trading is likely to remain cautious ahead of today’s all-important non-farm payroll data release and given the recent strength in the ISM manufacturing employment data and the jobless claims 4-week MA falling sharply we anticipate a rise of around 255k. While such an outcome is likely to provide further impetus for higher UST yields we expect the impact on less vulnerable EM credits, such as Russia, as limited and a further tightening in the RU30 spread towards +200 bps in expected.
February 03, 2005
B&N Bank 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
Description
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.
VTB Capital Fixed Income Comment: Trading was confined to extremely narrow ranges
Description
Russian eurobonds were relatively flat yesterday in anticipation of the FOMC announcement and the Russian EMBI+ posted a marginal gain with the spread widening 1 bp to 203 bps. Indeed, trading was confined to extremely narrow ranges as the benchmark RU30 traded in a 1/16 range in London, opening at 1051/16 and edging higher to 1051/8. As expected, the Fed raised rates by a further 25 bps to 2.50% and made only minor alterations to the accompanying statement, albeit under the guise that policy is still accommodative and that accommodation can be removed at a measured pace. The move itself was largely EM debt supportive and following the modest spike in UST, RU30 traded at a high of 1051/4 in New York before closing slightly lower at 1051/8. As a result of the marginal price moves, the RU30 spread over 10-year UST was also relatively flat in a +212 bps to +213 bps range. While the other longer duration credits such as RU18 and RU28 were marked slightly higher, few trades actually occurred. In contrast to the sovereign, the ARIES curve continues to witness selling pressure and the short-end suffered most with the ’07 EUR FRN and ’09 EUR issues closing lower over the day. The performance of Russian corporate and banking sector eurobonds was somewhat mixed and the industrial credits, namely the ALROSA ’14, Severstal ’09 and ’14 outperformed. Similarly, positive reports regarding Vimpelcom’s ongoing negotiations with the tax authorities provided support for the company’s bonds and both the ’09 and ’11 were marked higher. Russia has opened this morning at similar levels to yesterday close, RU30 trading in a 1051/16-3/16 (+214 bps to +212 bps over UST) range. Following the Fed’s unchanged stance the market focus remains firmly entrenched on tomorrow’s all-important non-farm payroll data and Fed Chairman Greenspan’s scheduled speech in London on the US current account position (Friday). We continue to uphold our positive outlook for Russian debt performance and view +200 bps over UST as the near-term target and the compression towards Mexico’s sovereign credit curve as the medium-term aim. Today’s key data highlights remain the ISM non-manufacturing survey, factory orders, non-farm productivity and weekly jobless claims.
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