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Source Research
September 07, 2005
Raiffeisen Bank Fortnightly Investment Insight
Market view ) the fortnight ahead Investors in Russian equities are being torn between the desire to take profits after an almost four-month bull run and the hunger to buy on the dips. Having completed its quest to reach 900 points, the benchmark RTS index set off towards 1,000 this week. Ample inflow of domestic liquidity ensures stable bids with any attempt to take profits meeting constant demand from buyers. While across-the-board profit-taking seems premature, the market is clearly overbought at these levels and a period of correction may soon step in. Russian second-tier oils: A variety Over the last month second-tier Russian oil companies have undergone a certain revaluation, triggered by a plethora of events, including a successful Urals Energy IPO, PetroKazakhstan takeover by CNPC, and AFK Sistema buying into Bashkir oil sector. Baltika vs Lebedyanski: juice looks sweeter The consumer sector has earned a reputation as one of the most challenging in the Russian equity market. Soaring consumer spending, coupled with the scarce supply of assets with exposure to the sector, has already sparked a rally in existing consumer stocks. Despite the recent growth spurt, however, we still see room for turning a profit, and here we focus on two beverage market mainstays: Lebedyanski and Baltika.
Alfa Bank Alfa Bank\'s Weekly Report
NEWS OF THE WEEK President confirmed weakening in fiscal policy, we keep 12% inflation target for next year but see 6.2% growth rate Exchange and money markets The lack of support for the dollar on behalf of the CBR is unsettling market players and has led to a further strengthening of the ruble. The strengthening flow of petrodollars is having a supporting effect on the ruble. Some worsening of ruble liquidity is likely only on Friday as part of preparation for tax payments and placements planned for next week. Ruble bonds market This week, all factors point towards a continuation of the price rally in the ruble debt segment. Even first tier bonds have yet not fully reacted to yield declines in related sectors. At the same time, less liquid bonds in the 2nd and, in particular the 3rd tier, have not managed to react to the change in the market situation. In the sub-federal sector, demand is continuing for Moscow-39, while preparation has begun for the placement of bonds of Samara region Eurobond market This week the market will continue to estimate the damage to the US economy from Hurricane Katrina. Investors primarily want to know whether rise in oil prices will have an effect on inflation or economic growth. Prices of Russian Eurobonds are being supported by high oil prices and expectations of an upgrade of the country?s sovereign rating by Moody?s. Russia-30 this week may surpass the level of 116% of nominal.
September 06, 2005
B&N Bank MDM Fixed Income Daily
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- General recommendation for long bonds changed from Buy to Hold on good market performance
- Moscow-39 downgraded to Hold on reaching our target 7.35...
FX and money market On Monday the rouble continued to appreciate reaching RBL/US$28.15 – a level last seen in February. The CBR reduced its support of the dollar and allowed the appreciation of the rouble to be even stronger than the bi-currency basket allowed. The mess with inflation release for August (please, see our economic commentary section) consequently increased uncertainty about further FX policy of the CBR. Although we cannot rule out the CBR will revise its FX policy soon to suppress inflation, we do not think it will take place this week. We are likely to enter into a period of change, which should result in more volatility for the rouble any way. In the upcoming week we advise to continue closely watching the euro’s performance. Today we expect to see the rouble in the range of RBL/US$28.20-28.25. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Monday is usually the slowest and the weakest day of the week, but yesterday refuted this rule: strong rally continued both in long OFZs and long municipals, while corporate bonds were also growing, but significantly less actively. Trading activity was at the average level of recent weeks. Among external drivers that supported local debt market growth the main ones were the significant appreciation of the rouble and also the relative cheapness of rouble funding: 1-day MIBOR is now at 2.05% - at its ‘normal’ low level usually observed in absence of liquidity deficit. Government bonds Growth in long OFZs seems not to have any limits: following a very strong Friday, traders resumed lifting prices of government bonds on Monday: OFZ 46014 +95bp, OFZ 46017 +112bp, OFZ 46018 +123bp. Since Friday, the long end of the OFZ curve has been flat, and now it is located approximately at 7.05-7.15%. In our weekly report published yesterday we specifically addressed the question of how far can long OFZs grow for current levels. In our analysis we looked at the spread between OFZ 46014 and Russia’30. It turned out that over the life of OFZ 46014 the average spread between the two bonds was close to 120bp, while now it is equal to 172bp. This result is a bit surprising, but the explanation is very simple: Russia’30 was recently growing even faster than long OFZs. Taking this into account, we concluded that OFZ 46014 can further descend in yield by more than 50bp – to level 6.5%, and at this point it will achieve the fair (from a historical perspective) spread to Russia’30. Municipal bonds Due to the rally in long OFZs, long Moscow bonds were on Monday also moving higher. Moscow-39 was this time an absolute growth leader: the bond appreciated 194bp, having reduced its yield to 7.24% and having compressed its spread to the OFZ curve from 43 to 26bp. In this movement the bond surmounted our target level 7.35%, so now our recommendation regarding Moscow-39 changes to a Hold. We do not recommend selling the paper now, as we believe that even in absence of growth of long OFZs Moscow-39 retains some spread compression potential. On Monday, other long Moscow bonds were significantly behind Moscow-39, so now they are looking increasingly attractive. We specifically advise buying Moscow-38, Moscow-41, Moscow-36 and Moscow-29, all of them having a yield reduction potential of at least 25bp. Yesterday we recommended for buying YaroslavlReg-2 and MosReg-3, as shorter non-Moscow securities with a good yield, at the same time not lacking some price upside. Unfortunately, buying these bonds is no longer looking attractive: both papers appreciated yesterday 33bp and reached YTM 7.95 and 6.71% accordingly. Now the bonds are looking fairly valued, so we are downgrading them to Hold. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-4 +16bp, Lukoil +-14bp, FSK UES +48bp. Second-tier bonds: Pyaterochka +135bp, Salavat-2 +16bp, UrSI-4 +4bp, CenTel-4 +44bp, ChTPZ +23bp. Finally, Pyaterochka that was recommended by us for buying in the end of August resumed its growth and at once jumped 135bp reducing its yield to 8.8%. Our target for the bond was located at 8.75%, but we maintain a Buy recommendation regarding Pyaterochka, as the premium the latter is paying over CenTel-4 is now 40bp, being ungrounded from a credit standpoint. Also, ChTPZ grew 23bp yesterday, having reached YTP level 8.47%. The fair level for the bond is estimated by us at 8.4%, so we also maintain a Buy recommendation regarding this paper. Among shorter bonds, we continue to recommend for buying the following papers: RusAl-2 (YTM target 7.25%), Gazprom-5 (YTM target 6.5%), Gazprom-3 (YTM target 6.25%). Short term market view Due to the recent significant market growth we are changing our general recommendation regarding long rouble bonds to Hold. This does not preclude buying relatively undervalued securities mentioned above. We believe that the upward movement should gradually lose momentum this week, but is likely to continue till mid-September. Dmitry Dudkin, Moscow (7 095) 755 5480 Inflation slows due to deflation (MoM) in August In August, monthly deflation of 0.1% (MoM) helped to reduce inflation to 12.3% (YoY) - still above targeted level of 8.5-10% Today, the FSSS released its inflationary figures, which were not very pleasant for the government. Last Friday, First Vice Chairman of the CBR Alexei Ulyukaev announced (with references to the FSSS) that monthly deflation was stronger at 0.3% (MoM) in August. The actual deflation of 0.1% (MoM) appeared to be close to the market consensus and confirmed the views that the CBR cannot rely on seasonal drops in fruit and vegetables if it wants to see slowdown in annual inflation. In August, inflationary pressure remained high and inflationary target of 10% still looks unattainable. Although the long-awaited seasonal drop in fruit and vegetable prices helped to reduce annual inflation to 12.3% (YoY) in August, we believe this slowdown is not sustained as core inflation remained high at 0.5% (MoM) in August (without seasonal drop in prices, August inflation would amount to 0.6-0.7% (MoM) – reiterating May-July results). In September, monthly deflation also looks likely – but now it is absolutely clear that additional anti-inflationary measures are still necessary if the government wishes to see figures under 2004’s 11.7%. Currently, the CBR keeps the rouble dependent on the bi-currency basket (35% of euro, 65% of dollars), but we cannot rule out the decision about a turn in the FX policy which will make the rouble less dependent on the euro and allow it to appreciate against the dollar. For example, yesterday the CBR allowed the rouble appreciate by 10 kopecks above the level which was suggested by the bi-currency basket. Investment implications: August deflation was lower than the government and the market previously expected, which might result in about turn in current FX policy. We believe that the rouble appreciation against the dollar look unavoidable if the government wants to see slowdown in 2005 inflation vs. 2004. We maintain our view on the rouble at RBL/US$27.5 by 2005-end and CPI at 11.5% (Dec/Dec). Julia Tsepliaeva, Moscow (7 095) 755 5489
Raiffeisen Bank Russian Daily Monitor
Oil tax plan unrealistic The Economic Ministry is hatching yet another plan to curb inflation by fine-tuning oil sector taxation. According to Vedomosti, a draft bill envisages the raising of marginal tax rates on crude exports to 100% when Urals fetches over USD 27 per barrel, while simultaneously reducing the burden of the unit-of-production-based Mineral Extraction Tax. The measures should render domestic refining a preferred alternative for Russian oil companies. We do not believe the project is viable, as it could lead to significant redistribution of profits to companies with excess refining capacity. Contrary to the plan ,s goal, Russian majors could try to squeeze a higher margin from their domestic business, leading to higher gasoline prices. Besides, Russia ,s inefficient refineries could raise gasoline production only together with higher heavy fuel oil output, for which there is insufficient domestic demand and insufficient capacity to export it. Gazprom chooses partners for pipeline Reports on Monday suggested that Gazprom had chosen Germany ,s BASF and E. ON Ruhrgas as partners for the construction of the North-European Pipeline (NEP). The agreement should finally be signed Thursday. Gazprom will own 51% of NEP, and the remaining 49% will be divided among partners (the exact ratios have not been reported). Gazprom estimates the project ,s cost at USD 5 bn, but others have estimated it may be higher. We see the launch of NEP as positive for the Russian giant as it should decrease Gazprom ,s dependence on the Ukrainian transit system while at the same time allowing the gas giant to expand its exports to the lucrative European market. S&P upgrades Vimpelcom to BB Standard and Poor ,s has upgraded Vimpelcom ,s credit rating from BB- to BB with a positive outlook, reflecting the company strong performance, the rating agency said Monday. S&P said it took into account Vimpelcom ,s improved profitability, the sound potential of the Russian mobile market and the operator ,s expanding market share. The main constraints for the company ,s rating are increasing competition in the Russian mobile market, regional development risks and the company ,s negative free cash flow. We see the upgrade as a logical step, as it reflects the quantitative improvement in the company ,s financials. Vimpelcom ,s improving margins, growing market share and efficient cost control, accompanied by possibly lower-than-reported 2005 capex should translate into positive free cash flow in 2006. VimpelCom ,s total debt of USD1.6 bln currently equals about 1.2 times its estimated FY2005 EBITDA )we believe these figures leave potential for further rating upgrades. Money market Global trends continue to shape local money market dynamics, but a fundamental push toward a stronger rouble on the back of rich foreign currency inflows may have begun, adjusting the rouble ,s correlation with the euro-dollar rate. On Monday the euro slipped slightly to 1.2525 against the dollar from 1.2541 on Friday, while the dollar lost about 10 kopecks on the day, plunging below 28.20 roubles. Monday ,s local dollar fall does not quite comply with currency basket rule that stipulate close intraday correlation between rouble-dollar fluctuations and the euro-dollar rate. The likely explanation is a Central Bank attempt to adjust the currency basket to increase the euro ,s weight further. That in turn would make the rouble-dollar rate more volatile in response to moves from the currency heavyweights and would allow more stability in the rouble-euro rate. The weight adjustment would have enhanced rouble strengthening against the dollar after the greenback ,s recent fall against major currencies. We do not believe, however, that the Central Bank will give up its currency basket mechanism, which preserves the stability in its exchange rate policy and allows it to build up FX reserves without much disturbance from speculative flows. However, further adjustments toward a heavier euro weighting are likely. With the euro-dollar rate likely floating around 1.25 in the coming days on the back of relatively slow newsflow, we see dollar floating between 28-28.2 against the rouble. However, the likelihood of further rouble appreciation is increasing. Bond market Strong sentiment has been with rouble bond investors since the beginning of the month, and the Central Bank ,s somewhat unexpected push for a stronger rouble against the dollar on Monday (out of sync with a stable dollar globally) could convince the market that favourable domestic exchange rate moves could continue for some time. With prices remaining high, the potential for across-the-board gains is not obvious, and we recommend looking to news releases to help pick the right names. S&P upped Vimpelcom ,s credit rating (see story above): positive news for the mobile operator ,s traded debt, but those rouble bonds are somewhat thinly traded and thus not too attractive. Novatek released amazing 2Q05 financials on Monday evening: sales more than doubled y-o-y to USD 460 mn while net profit leapt more than six-fold to USD 200 mn. EBITDA (adjusted for non-cash items and one-off gains) totalled USD 170 mn, thus improving the debt to 1H05 EBITDA ratio to 2.09, or roughly full coverage from a full-year perspective. Expect these results to be reflected in the company ,s bond price on Tuesday. On Monday due to a holiday in the United States, the Russian Eurobond market saw little activity with a slight expansion of the yields almost across the board. On Tuesday we believe the market should return to Friday ,s yields on continuing upbeat market sentiment and strong demand for Russian papers. The credit rating upgrade of Vimpelcom on Monday to BB by Standard and Poor ,s makes the papers of the second largest mobile operator in Russia an attractive investment opportunity. It seems likely that Vimpelcom ,s eurobonds did not price the news in full on Monday. Equity market Trading in Russian equities proved a little bumpy on Monday, as some investors sold in anticipation of a long awaited correction while optimists stubbornly bought on the dips. The benchmark RTS index finished the day almost unchanged at 910 on somewhat cooler turnover of USD1.1 bln. Much of the same should be expected on Tuesday with no clear catalyst behind a move in either direction. While many argue that the market is overbought, some interesting investment opportunities still exist. We would highlight Novatek, which should be again on investors , radar screens after the publication of excellent 2Q05 financial results. We also like juicemaker Lebedyanski on fundamental grounds and expect it to outperform its peers in the consumer sector. Elsewhere, investing in second tier oils is a defensive way to play the Russian oil story * given higher portfolio investors ownership in these companies, they are less volatile in an environment of fickle oil prices.
VTB Capital Russian GDP Indicator
ING Wholesale Banking Russia Russian Fixed Income Weekly
Rouble Bond Market Last week produced very positive results on the local bond market, as the reduction in money market rates and continuation of the Russian Eurobond rally together succeeded in pushing prices of the local debt up. Similar to the previous week, second-tier bonds were on average the best performers this time, being followed by OFZs and long munis, and only then – high-grade corporate papers. Russia’30 was seen last Friday at level 115 – an absolute price maximum in the history of the bond. Although some spread compression actually helped the Russian benchmark achieve this success, the main work was done by the US Treasuries, as US10Y descended over the week in yield from 4.17 to current 4.03%. Nevertheless, our technical view for US Treasuries remains short-term positive, for we believe US10Y still retains potential for some yield decline, at least to the upward sloping yield support line currently located at 3.9%. In the medium-term perspective, US 10-year bonds are likely to remain locked in the range of 3.9-4.5%. As Russia’30 is now trading with a spread of 125bp over US10Y, its further spread compression potential is limited, although, again, existing, if we take into account a very high probability of further foreign debt prepayments and a possibility of another sovereign rating upgrade, most probably from Moody’s. But even if the spread on average remains close to today’s levels, Russia’30 will not be able to deviate significantly from current levels and will be contained within a range of 111-116. As we already mentioned, an improvement in money market conditions, which was previously expected by us, helped the market grow. Right now, 1-day MIBOR is at 2.12%, which is very close to its natural level observed at times of no liquidity deficit. Only on September 1 this figure was equal to 4.74% significantly limiting demand for high-quality rouble bonds. Until mid-September we do not expect any difficulties on the money market, but already on September 15 Russian companies will be paying the social tax, which should diminish the supply of free roubles and increase the short-term rates. Government Bonds On Friday MinFin conducted 4 small auctions selling the remaining parts of several old tranches of OFZs: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. The placement volume for OFZ 46017 (11 years to maturity) was the highest, so the main events were happening in this paper. On Thursday the bond was trading at 7.42%, but after the auction the yield turned out to be 7.23%, which corresponded to a price growth of 132bp. This upward jump produced a parallel shift in other long government bonds, among which naturally the most notable was the longest OFZ 46018 (16 years to maturity), which gained 240bp reducing its yield to 7.28%. As a result, the yield curve is practically flat now at the long end, the latter residing at 7.2%. Largest price changes in the sector over the week: OFZ 46018 +324bp, OFZ 46017 +247bp, OFZ 46014 +152bp. The main question that is expected to now interest the market participants the most is: how far can the rally in long OFZs go? We were really surprised when we looked at the graph spread graph between OFZ 46014 and Russia’30 located below. There’s a significant duration mismatch between OFZ 46014 (5.6 years) and Russia’30 (8 years), but still we had to select OFZ 46014 for our analysis, as it is one of the oldest long OFZ bond now outstanding. What this picture is telling us is that in spite of some spread decline that has been happening since June 2005, the spread between local bonds and Eurobonds is now (190bp) significantly larger than the average that can be estimated at 120bp. This, in turn, means that, as now OFZ 46014 is located at 7.2%, it can theoretically move further down in yield to 6.5% and at this point will be fairly valued from a standpoint of its relation to Russia’30. One thing significantly impedes this type of analysis: presence of currency risk. On the other hand, it appears more or less correct to say, that over the period the graph is plotted for, market expectations regarding future rouble rate did not change much: we still expect that the rouble will be appreciating, as we did 2 years ago, and we believe this opinion is close to the market consensus. Municipal Sector Volume leaders in the sector in secondary trading over the week: Moscow-39 RBL2.5bn, Moscow-32 RBL1.9bn, MosReg-5 RBL1.9bn, Yakutia-5 RBL1.1bn. Price leaders: Moscow-39 +141bp, Moscow-38 +97bp, Moscow-36 +63bp. This week we again believe that Moscow-39, the longest bond on the curve, remains the most attractive investment in the sector. In spite of the fact that last Friday the bond gained 68bp and in yield broke downwards our target level 7.6%, having traded at 7.54%, its spread over OFZ curve is now close to 40bp – wider than before. Considering the fact that one month ago this spread was almost equal to zero, we maintain our Buy recommendation regarding Moscow-39 and relocate our target for the bond to 7.35%. If our predictions come true, Moscow-39 should provide the largest capital gains on the Moscow curve, but if more exposure to Moscow risk is desired, we also recommend buying other long Moscow issues, such as Moscow-38 and Moscow-36. Among shorter non-Moscow bonds that are more balanced between duration and yield, we would like to recommend YaroslavlReg-2 (8.2% for 2 years) and MosReg-3 (6.9% for 2 years). The former has relatively low liquidity, but promises more price upside: our target for it is located at 7.75%, which translates into a price growth of 70bp. MosReg-3, on the contrary, has greater trading liquidity, but is expected to decline in yield only by 15-20bp. Corporate Bonds Volume leaders in the sector in secondary trading: AvtoVAZ-3 RBL4.9bn, FSK UES RBL1.6bn, RZhD-3 RBL1.5bn, RusStand-3 RBL1.5bn. Price leaders for different time horizons are displayed in the table below: Over 7 days Over 14 days Over 1 month CenTel-4 +166bp CenTel-4 +241bp CenTel-4 +376bp Salavat-2 +137bp Salavat-2 +137bp KrVostok +232bp Lukoil +50bp OMK-1 +118bp Volga +232bp We specifically would like to recommend market participants to fix profits in CenTel-4, as constant rally in this bond finally compressed its spread over the OFZ curve to values below 2%, which we believe is completely ungrounded from a credit point of view. On the other hand, on the background of this growth other long corporate bonds are now looking very attractive. For example, Salavat-2 is still yielding 8.64% for 4 years, thus paying a premium over CenTel-4, while we believe the bond should trade at a discount to the latter. Our target for Salavat-2 is currently located at 8.6%, but it has been there already for some time and we will be reviewing it once it is reached. Also, we recommend ChTPZ as a very attractive purchase. Currently, the bond is yielding 8.57% to put in 3 years, paying a premium to similar bonds, like OMK, which is trading at 8.1% for the same term. We believe that ChTPZ will be able to significantly reduce this premium in the nearest future, so we are locating our target for the bond at 8.4%. In the shorter segment, we maintain Buy recommendations for Gazprom-3 and RusAl-2. Spread of Gazprom-3 (6.45% for 17 months) to the Moscow curve is now close to 75bp, which is completely ungrounded, considering longer Gazprom-4, which is paying no premium to the corresponding Moscow issues. We believe that within 1 month Gazprom should descend in yield to 6%, which promises a price upside of at least 50bp. RusAl-2 is now trading at 7.65% to maturity in 2 years, while our target for it is located at 7.5%. This constitutes a price growth potential of 30bp. Market View for Coming Weeks In our opinion, Friday’s rally is not the end of the upward market movement, but rather an active start of another step of it. We expect positive money market conditions to prevail until mid-September, which should further support demand for the local debt. As we demonstrated, current position of the OFZ curve allows for more yield decline, which constitutes an upside for the entire market for the medium-term horizon. Therefore, our general recommendation regarding long rouble bonds remains a Buy.
September 05, 2005
B&N Bank MDM Fixed Income Daily
B&N Bank Russian CLN Market Data
Raiffeisen Bank Russian Daily Monitor
August deflation means little Preliminary estimates from the Central Bank of Russia indicate 0.3% m-o-m deflation in August. This is in line with government expectations, but will not help much in meeting the full year target of 8.5-10%. The increased supply of agricultural products pushed prices down by 4% in August and the Central Bank expects the fall to spread over the coming month. However we see the likelihood of September deflation as remote. It has never happened over the past seven years. Moreover we would not be surprised to see some acceleration in price growth by the end of the year, a move likely to be enhanced by a new wave hikes in petroleum price and transport costs. Speeding expansion of money supply and strong consumer demand should fuel inflation as well. Our inflation estimate to the end of 2005 is still 12%. Gazprom LNG reaches U.S. Gazprom ,s first tanker of liquefied natural gas (LNG) arrived on the U.S. Atlantic coast on Friday, the company reported. Gazprom is to act as a trader for this and other shipments expected in 2006-2009, aiming to fine tune the logistics of supplying America with Russian gas. Starting from 2010, Gazprom expects to start shipping its own LNG on long-term contracts. Meanwhile, Gazprom and Royal Dutch/Shell have made some progress with an asset swap involving 25% plus one share of Sakhalin-2, a key project that envisages the construction of Russia ,s first LNG plant by 2007. Gazprom ,s Deputy CEO Alexander Medvedev said Friday that the deal should be finalised by August 2006. Shell will likely have to compensate Gazprom because the stake in Sakhalin-2 (offered by Shell) has lost some value following a strong upward revision of cost estimates for the project, making the deal even more attractive for Gazprom, according to Medvedev. Gazprom is moving in the right direction with its LNG strategy, we believe. However, we would welcome somewhat faster progress in the selection of a partner for the development of the giant Shtokman Arctic offshore field, which should come jointly with the construction of another LNG plant somewhere in northern Europe. DT may sell its stake in MTS in two weeks Deutsche Telecom may sell its 10 % stake of MTS in two weeks, Reuters reported Monday, citing an anonymous source from the banking sphere. The stake would likely be purchased by AFK Sistema, which would be positive for the valuation of Russian mobiles. DT ,s sale of the stake would be in line with its strategy of managing its non-controlling assets. According to the report, it will do so by the end of 2005. However, there was no certainty about how the stake would be sold. MTS , ADR program is almost full, and thus only an insignificant portion of the stake could be sold in the form of ADRs. Besides, it would be impossible for DT to sell the stake on the open market without a significant decline in MTS , share price. However, the fact that the rumours about the prompt sale came from the banking sphere suggests that the likely buyer might be AFK Sistema (or a consortium led by Sistema), as the latter could attract a loan for purchasing shares. The private placement of an MTS stake is positive news for the valuation of Russian mobiles, as it reduces the risk of additional supply in the market. We think that the Russian mobiles have lagged behind the exceptional growth of the Russian equity market in recent months mostly because of the risk of extra supply of mobile assets. The increased probability of sale to strategic investors deflates the risk. At the same time, we expect Vimpelcom ,s share price dynamics to be better than that of MTS, as the former has demonstrated more financial improvement than the latter. Money market Last week ,s relatively poor string of data releases from the United States, ending with lower )than-expected improvements in employment on Friday, pushed the dollar back down to its late May levels. The economic impact of Hurricane Katrina has been undermining the dollar ,s positions as well, promising to keep energy costs high in the short term. The euro climbed to USD 1.257 on Friday, pushing the dollar down to 28.23 against the rouble. With little interesting data from the United States this week, and concerns about hurricane damage and surging oil prices likely to remain high, the euro should remain strong against the dollar in the coming days. With some support from the August release of PMI Services in the eurozone, due on Monday, the united currency may appreciate further. That would likely pull the greenback down to 28.10 against the rouble. Bond market Benchmark rouble yields decreased Friday in a synchronised move on the back of yet higher liquidity coupled with yet stronger rouble, with all these trends to be continued this week. Oil & gas blue chips (Gazprom 4 and 5, LUKoil 2) and most fixed line telecoms joined the rally. Meanwhile, there is market talk that OFZ might be heading towards significantly narrowing its spread to Russian sovereign Eurobonds. Approached crudely, the spread is currently 193 bps (between the OFZ 46014 and the Russia ,30), so there is indeed something to be gained here. However, adjustments for currency risks (or cost of hedging), different levels of liquidity on these markets, and the technical costs of complying with Russia ,s currency controls could wipe out the most part of these potential gains. Russian Eurobonds were in good spirits last week and bond market sentiment looks likely to remain upbeat this week, which should bring in further yield tightening and credit spread contraction. The end of summer was marked by slack in consumer and business confidence in the United States as well as rising concerns of a slowdown in the U.S. economy in the aftermath of Hurricane Katrina. That shifted market expectations towards looser Federal Reserve policy with some pauses in interest hikes made already this year. In addition to changes in U.S. interest rate expectations, Russian Eurobonds may still appreciate on their own steam: further early repayment of debt to the Paris Club and the likely credit rating upgrades. On Friday, the yield of Russia ,30 slipped to 5.27% losing 4 bps on the day with sovereign credit spread narrowing to 123 bps. The yield of the benchmark 10-year UST remained almost flat at 4.03%. Equity market Having achieved its quest to reach 900, the Russian equity market set off towards 1,000 on Friday. At USD1.7bln, volumes were unusually heavy for the last day of the trading week. Ample inflow of domestic liquidity ensured stable bids with any attempt to take profits meeting constant demand from buyers. This money stream was particularly evident in last week ,s performance from RAO UES * a darling of local speculators * which posted 13.2% w-o-w gain on record volumes. We expect more roaring trade on Monday as positive sentiment and an abundance of free cash in the banking system continue to push prices higher.
ING Wholesale Banking Russia Russian Fixed Income Daily
- Russia\'30 touches 115, trades at 123bp over US10Y
- Moscow-39 reaches target 7.6%, the latter moves to 7.35%
- General view: short-term positive...
FX and money market On Friday the rouble significantly appreciated to RBL/US$28.29 gaining 16 kopecks (sometimes during the trade session it even reached RBL/US$28.23) which is three-month low. The main reason of strong upward pressure on the rouble was the deep dollar’s drop against the euro to US$/EUR1.254. In addition, scheduled for Friday US changes in non-farm payrolls were lower than market expectations and as a result, did not support the dollar. Currently, uncertainty regarding euro/dollar trend makes Russian FX market rather frail and today we expect to see the rouble in the range of RBL/US$28.20-28.25. Money market interest rates reached their “normal” level while bank’s balances in correspondent accounts at the Russian central bank fell to RBL304.8 bn today from RBL306.4bn on Friday. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market On Friday the rouble bond market finally managed to get over the consequences of the latest liquidity squeeze and demonstrate significant growth, which was evident in all three market sectors. The primary growth driver was, however, a surprise to us: insignificant OFZ auctions for placement of remaining parts of old OFZ tranches again, as in the case with several latest OFZ placements, produced a rally in long OFZs, which, in turn, induced strong buying in non-government market sectors. US Treasuries, on the other hand, did not respond on Friday to the US payrolls data, which turned out to be rather ballpark. Right now, US10Y is at 4.03% - very close to where it was on Friday morning. In spite of that, Russia’30 again made a step up and was trading as high as 115, which reduced its spread over US10Y to 123bp – another all-time low. It is pretty obvious that the upside of Russia’30 is waning, but we believe it is still present: further spread compression potential is looking doubtful, but US10Y can reach level 3.9%, which should take Russia’30 as high as 116. In the medium-term perspective, Russia’30 is expected to fluctuate in the range of 111-116. Government bonds As we already mentioned, Friday growth of the entire market was provoked by the rally in long OFZs that followed the publication of results of several small OFZ auctions. The sizes offered to the public were: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. The placement volume for OFZ 46017 (11 years to maturity) was the highest, so the main events were happening in this paper. On Thursday the bond was trading at 7.42%, but after the auction the yield turned put to be 7.23%, which corresponded in price to a growth of 132bp. This upward jump produced a parallel shift in other long government bonds, among which naturally the most notable was the longest OFZ 46018 (16 years to maturity), which gained 240bp reducing its yield to 7.28%. As a result, the yield curve is practically flat now at the long end, the latter residing at 7.2%. In our previous updates we already stated that the current situation in the government sector does not allow for predictions with a reasonable degree of certainty. Only one thing is more or less clear: in the nearest future long government bonds should not significantly correct downwards, but how far they can grow further – is very hard to determine. Being unable to set clear goals for long OFZs now, we do not recommend market participants to continue playing speculative games with these papers. Municipal bonds Due to the rally in long OFZs, long Moscow bonds were on Friday also moving higher. Specifically, Moscow-39 grew 68bp reducing its YTM to 7.54%; Moscow-38 jumped up 46bp reaching YTM 7.3%; Moscow-36 gained 47bp, etc... Having demonstrated such growth, Moscow-39 (the longest bond on the curve, 9 years to maturity) finally surpassed our target set for it at 7.6%. On the other hand, the spread of Moscow-39 to the OFZ curve increased from 37 to 43bp due to forward growth in OFZ 46014. Therefore, we maintain our buy recommendation for Moscow-39 and simply relocate our target for its YTM to 7.35. Among non-Moscow bonds several shorter issues now appear cheap, as traders temporarily lost interest in them. We specifically would like to mention YaroslavlReg-2 (8.2% for 2 years) and MosReg-3 (6.9% for 2 years). Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-4 +28bp, Lukoil +30bp, RZhD-3 -2bp, FSK UES +48bp. Second-tier bonds: Megafon-3 -3bp, Salavat-2 +37bp, UrSI-4 +16bp, CenTel-4 +24bp, ChTPZ +16bp. Lukoil grew 30bp on Friday reducing its yield to put in 2 years to 6.54%, which now appears very low compared to its peers bond RZhD-2 (6.74% for roughly the same term). The only explanation for that is the shift in pricing of Lukoil from put option to maturity, to which the bond is now yielding 6.91%. This looks in line with such high-grade bonds, as Gazprom-4 and RZhD-3 (both yielding close to 7%), but is again not cheap. Further upside of Lukoil is possible only with general market growth. As indicated, Salavat-2 grew on Friday 37bp and is now approaching our YTM goal 8.6% now yielding 8.64% for 4 years. We maintain our buy recommendation for the bond, but would like to warn that profit-taking in it is approaching. Also, ChTPZ, previously recommended by us for buying, gained 16bp on Friday having descended in yield to 8.57% to maturity in 3 years. Out target for the bond is set at 8.4% and we expect it to be reached in the nearest future. RusAl-2 still offers a very good buying opportunity: the bond is now at 7.69% to maturity in 20 months and it was unaffected by Friday’s rally. Our target for it was previously located at 7.5%, and we maintain a Buy recommendation for this paper. Among high-grade bonds, only Gazprom-3 appears to be significantly undervalued. The paper is yielding 6.44% to maturity in 1.5 years, while it can easily trade as low as 6%, where TNK-5 currently is. This constitutes a price upside of at least 50bp. Short term market view We believe that Friday’s growth was not the end of the broader upward movement, but just an active start of it. Until mid-September, the financial system should not see any rouble liquidity deficit, while Russian Eurobonds are expected to remain strong. Our general recommendation regarding long rouble bonds remains a Buy. Dmitry Dudkin, Moscow (7 095) 755 5480
VTB Capital Russian Services PMI
September 02, 2005
B&N Bank MDM Fixed Income Daily
Better sellers: VTB\'35, GAZ\'13, EVRAZ\'09, MTS\'08
Raiffeisen Bank Russian Daily Monitor
Vedomosti: Vimpelcom eyes SMARTS Vedomosti reported Friday that Vimpelcom is interested in acquiring SMARTS, Russia +s fifth largest mobile operator with 2.4 mn subscribers. We see the story as little more than rumours. The current shareholders of SMARTS estimate the value of the company at more than USD 700 mn, indicating a price of USD 300 per subscriber, whereas subscribers of Vimpelcom, in turn are valued at USD 290. Vimpelcom is the leader of Volga mobile market (where SMARTS operates), and thus it would seem unwise to pay such a high price for SMARTS. However, the Russian mobile market does need consolidation, in the highly competitive Volga region in particular. We await higher M&A activity from MTS and Vimpelcom in Russia in order to remove excess competition. However, the prices of deals are expected to be well below than that demanded by SMARTS. Money market A new string of poorer-than-expected data from the United States released on Thursday nudged the euro back up to late May levels of around USD 1.25. The ISM Manufacturing index slipped to 53.6 in August from 56.6 in July, while PMI Manufacturing in the eurozone in August experienced only minor slippage to 50.4 from 50.8 the previous month. The euro ,s rebound was also backed by continuing speculation on a slowdown in the U.S. economy in the light of surging oil prices, Hurricane Katrina and the likely cooling of the housing market. The fact that the U.S. economy may have started to slow before the hurricane, as evidenced by recent business activity indexes, may force the Federal Reserve to give up raising rates, which would also undermine the dollar ,s position. Although recent releases favor the euro against the dollar, U.S. payrolls scheduled for release Friday, may calm bullish euro sentiment. If the readings on payrolls indicate continued strong employment, the euro may stay below 1.25 against the dollar, otherwise, the euro could appreciate further. The dollar ,s value on the local market is expected to be close to 28.3 roubles on Friday, following euro-dollar dynamics in accordance with the Central Bank ,s currency basket rules. Bond market The rouble bond market strode upwards on Thursday helped by the old reliables: high liquidity, a strengthening rouble, and narrowing Eurobond spreads. Crucially, the market expects these factors to remain supportive for a while, thanks to high oil prices. However, the upward trend has essentially lasted since spring, and the market may be ripe for a minor correction which could be triggered by some technicality such as a (temporary) depreciation of the rouble, following a similar twist in global FX trends. The benchmark domestic yield curve flattened somewhat: the medium and long term segments of the curve rallied, with the Moscow ,38 yield sinking to 7.39% from 7.45%, while two short-duration papers maturing in 1H06 sagged, with Moscow ,35 yield rising to 5.65% from 5.40%. Thus, we see most short-term potential in long and medium duration corporate bonds, especially solid second-tiers, which should maintain their spread to the curve. The Russian Eurobond market is approaching new record highs as concerns rise that the United States economy may slow by the end of the year and Federal Reserve policy makers will have to end their tightening cycle sooner than was previously expected. The yield of the indicative Russia ,30 reached a record low 5.32% on Thursday, loosing 3 bps on the day, while the benchmark remained almost flat. The move towards lower yields in U.S. Treasuries may resume if upcoming employment data on Friday does not show notable improvements. Local Eurobonds are expected to follow this trend with tendency to further contraction of credit spreads, backed by improvements in macroeconomics and credit profile. On Thursday the sovereign credit spread tightened to 126 bps, down 3 bps on the day. Equity market As the week ,s trading winds down, activity is likely to be muted Friday relative to the heavy volumes of the past three days. The lust for oil should continue, however, as the market continues to play catch up with ever-increasing commodity prices. UES was the star of Thursday trading, climbing 4.3% on solid turnover. There was some speculation about strategic buying, but the logic behind such a move is not obvious. The stock might be simply catching up after a period of relative underperformance. The same is happening to juicemaker Lebedyansky, whose strong 2Q05 financial results published recently prompted a rapid revaluation of its shares. Some potential for further appreciation still exists in the latter, we believe. Elsewhere, oil and metal stocks were in stable demand on the back a surge in respective commodities. Telecoms were also well bid in New York, with MTS adding 1.1% and Vimpelcom climbing 0.3%. All in all, the RTS had climbed 1.42% by the end of the day, reaching 894.57, just a few notches short of 900, on combined turnover of USD1.4bn.
ING Wholesale Banking Russia Russian Fixed Income Daily
- Small OFZ auctions today
- Russian Standard upgraded 1 notch to Ba2
- Shorter Gazprom issues finally started growing...
FX and money market On Thursday, the rouble continued to appreciate as a result of the euro’s strength against the dollar to US$/EUR1.243 and by the end of trade it reached RBL/US$28.405. Currently, market players seem to be lacking decisive trading ideas and are probably taking a ‘wait-and-see’ attitude on the back of the unclear euro/dollar trend. Scheduled for today, US changes in non-farm payrolls could strongly influence the dollar’s performance which will consequently have an effect on the rouble. Just now the rouble is trading at RBL/US$28.30 and we expect to see it today in the range of RBL/US$28.29-28.35. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Thursday turned out to be a more positive day than previous days this week: trading activity was quite significant, especially in the corporate sector, while prices were growing. Appreciation was more evident yesterday both in the government and corporate sectors, while municipal papers appreciated only marginally. The money market conditions finally demonstrated significant improvement after the liquidity squeeze at the end of August. 1-day MIBOR descended over the course of yesterday from 4.74 to 2.61% - still higher than the ‘normal’ level, but already low enough to foster demand for rouble debt. Also, Russia’30 reached another all-time high: level 114.5 was achieved by it in the middle of the day on US10Y testing level 4%. The latter went as low as 3.98% in yield, but in subsequent trading erased these gains and is now located at 4.02% - very close to yesterday’s opening point. Our view for US Treasuries remains short-term positive: we believe US10Y is able to reach level 3.9% in the nearest future taking Russia’30 to 115.5. Government bonds For the first time this week long OFZs demonstrated notable growth yesterday, which was especially notable in OFZ 46017. The paper gained 62bp in price reaching YTM level 7.42%. We believe this agitation was a simple result of today’s placement of remaining parts of several OFZ tranches: market participants probably expected the auction to produce another rally and were buying long bonds in anticipation of it. On the other hand, we do not believe this rally has to happen: long OFZs are already looking quite expensive, so the placement may not significantly affect their pricing. In addition, the offering sizes are so small that many investors may simply choose to skip this auction having no hope of buying a significant volume there. We simply want to remind them that the offered sizes are: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. These figures are so small in comparison to regular OFZ auctions, that we don’t expect anything significant to happen to the market due to these placements. Corporate sector The LT credit rating of the Russian Standard bank was yesterday upgraded by Moody’s to Ba2 from Ba3. This event raised some interest for outstanding RSB bonds, among which the most interesting now are RusStand-3 (8.04% for 1 year) and RusStand-4 (also about 8% for 6 months). Market participants should not be mislead by the current price of RusStand-3 (104.9), as the bond still costs something like 100.5, but this high weighted average price yesterday resulted from an unfortunate buyer mistakenly taking an offer for RBL15mln at 110.5, which was purposely put at this level in a hope of such a mistake. Price changes of corporate benchmarks in secondary trading: Gazprom-4 +10bp, Lukoil +17bp, RZhD-3 +33bp, FSK UES -1bp. Second-tier bonds: Baltika +12bp, Salavat-2 +66bp, UrSI-4 +2bp, CenTel-4 +42bp, ChTPZ +4bp. Continuing growth of CenTel-4, which is currently yielding 8.61% to maturity in 4 years, supports our view that its peer bond Pyaterochka should trade at the least at 8.75%, as the latter is better than CenterTelecom from a credit point of view. We maintain a Buy recommendation for Pyaterochka. Salavat-2 gained 66bp yesterday, reducing its YTM to 8.75% for 4 years. Our target level for the bond is currently located at 8.6%, which still promises a price upside of 35-40bp. We maintain a Buy recommendation for Salavat-2. Finally, relatively short Gazprom bonds moved up a bit: Gazprom-3 gained 8bp, now yielding 6.44% to maturity in 16 months, while Gazprom-5 grew 17bp, reaching YTM 6.65% (for 2 years). Both bonds are currently recommended by us for buying with targets 6.25 and 6.5% accordingly. Recent growth of OMK bonds, that are now yielding 8.12% for 3 years, promises significant upside for one of our top picks ChTPZ. The latter is now trading at 8.64% and we believe that the spread of 50bp over OMK is ungrounded. Out target for ChTPZ is now located at 8.4%. Short term market view The short-term outlook appears quite positive: Russian Eurobonds are stronger than ever, cost of rouble funding should remain contained until mid-September. In such conditions increased portfolio duration should help capture better the capital gains, so our general Buy recommendation for long rouble bonds remains active. Dmitry Dudkin, Moscow (7 095) 755 5480 MoF on fiscal softening The Finance Minister Kudrin asked the investment community to support his position to prevent further softening of fiscal policy Yesterday, Finance Minister Alexei Kudrin began the active campaign against further softening of fiscal policy: he met with representatives of investment banks and express his views in Rossiyskay gazeta. He said that all MinFin’s effort to make 2006 budget rather conservative failed and budget expenditures were gradually increased by RBL568bn (US$20bn) over the initial MinFin’s plan while attacks on the stabilisation fund to spend this money on investment projects or increase in social expenditures strongly intensified. Fiscal policy softening is not a new phenomenon for Russia. In 2005, budget expenditures were additionally increased by RBL385bn. Yukos tax payments and high oil prices resulted in dramatic spike in budget revenues in 2005, making temptation to increase non-interest expenditures too strong for politicians, despite certain inflationary consequences of this decision. Although we fully share the minister’s position on the issue, Russia is very unlikely to tighten its fiscal policy in the coming years as oil revenues are likely to remain high. From political point of view, we believe Kudrin’s attempt to make the policy tougher is very important. Despite the fact that Kudrin remained the only consequent activist of a conservative fiscal approach and further promotion of structural reforms in the government, he is not alone as the investment community generally shares his views. The call for the investment community’s support may play a crucial role in reduction of expenditure appetite of the government. Investment implications: We welcome The MoF intention to fight against further fiscal softening. The investment community support may be crucial for keeping the fiscal approach more conservative. Julia Tsepliaeva, Moscow (7 095) 755 5489
September 01, 2005
Banco Bilbao (BBVA) Yield Curve Analysis in Brazil
Brazilian bonds opened slightly weaker today. It is no surprise since our market traded heavy for the last several days if compared to performance of other markets (equity, UST..) Bovespa moving higher at the moment and that may provide more fuel to lift bonds higher. The right strategy is to sell into the strength, reduce your long and wait for opportunity to go short. On the curve: Bra 40 still lags but not as much as yesterday. Bra 27 cheapened even more overnight, while Bra 25 grew more expensive. C bond looks ok here. Belly of the curve appreciated here: Bra 12, 11 all look expensive here and even Bra 09 looks less attractive. Bra 12? is still cheap, however, not as before and it is outperforming. Bra 10? became expensive here. RELATIVE VALUE IDEA: BUY BRA 27/ SELL BRA 25 PRICE YIELD SPREAD COUPON BRA 27 116.15 8.48 445 10.125 BRA 25 102.10 8.52 449 8.75 CURRENT YIELD DIFF -2BPS, HISTORICAL AVERAGE -9BPS I RECOMMEND CASH NEUTRAL RATIO: LONG 1 BRA 27 SHORT 1.15 BRA 25 COUPON DIFFERENTIAL WILL PROVIED POSITIVE CARRY. *PRICE LEVELS ARE BID/OFFER LEVELS; IT IS POSSIBLE TO DO A SWITCH AT BETTER LEVELS This document is intended for informational purposes only. It is not a solicitation, commitment or an offer to buy or sell or to participate in any particular trading strategy, nor is it an official confirmation of terms. You should consult with your own tax, legal and investment adviser on any such decision. It may be based on information generally available to the public from sources believed to be reliable. No representation is made that it is accurate or complete or that any returns indicated will be achieved. Past performance is not necessarily indicative of future returns. BBVA disclaims any and all liability relating to these materials, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this document. Price, availability and other information are subject to change without prior notice. Golodner, Aleksandr [Aleksandr.Golodner(at)bbvany.com]
B&N Bank Russian CLN Market Data
B&N Bank MDM Fixed Income Daily
Here by our current interest level in USD bonds / can be changed during the day. Better sellers: ALROSA\'14, SEVST\'14 All prices are subject to call
Raiffeisen Bank Russian Daily Monitor
PMI growth hits 2005 high According to Russian Manufacturing PMI figures for August, published by Moscow Narodny Bank on Thursday, expansion in the sector is set to hit its highest pace since the start of the year. The index rose to 53 in August from 52.6 in July prompted by solid growth in output and new orders. The fall in manufacturing employment is slowing as well, with the employment component of the index finally nearing the neutral 50. However the noted improvements in manufacturing seem not as substantial to allow GDP growth for the whole year to ascend to last year ,s pace. Lebedyanski reports strong financials Lebedyanski, Russia ,s leading juice producer, has posted strong 1H05 financials under IFRS, showing that the company continues its expansion without seeing serious pressure on margins. Sales grew 37% y-o-y to USD 261.2 mn. Lebedyanski ,s juice sales grew 34% y-o-y, demonstrating an increase in both output and average price, which is a good sign in a highly competitive juice market. The baby food segment expanded drastically, growing 83% y-o-y (while accounting for only 9% of total revenues). The juicemaker ,s costs grew 38.8%, due to production expansion and higher marketing activity. As the result, the company ,s EBITDA and operating income grew 34% and 33%, accordingly, and EBITDA and operating margins remained almost unchanged at 26% and 24%, respectively. Net income declined slightly from 18% in 1H04 to 17.4% in 1H05. Our outlook for the company is strong and we think that Lebedyanski will continue to beat its rivals in both growth rates and profitability. Money market Surprisingly low Chicago PMI figures released Wednesday (49.2 compared with 63.5 the previous month) weighed down the dollar against the euro with the euro rate surging to USD 1.2345 from 1.2195 on the day. As a result the rouble is expected to gain ground against the greenback on Thursday pushing the dollar rate closer to RUR 28.40. Over the last two months the dollar has been facing support from a string of solid data on the U.S. economy, however, the greenback has been unable to continue its earlier impressive strengthening. In some respects this indicates that market expectations have already priced in upbeat U.S. prospects. Thus, currently rising concerns of a slowdown in the wake of soaring oil prices and Hurricane Katrina are likely to continue to undermine dollar ,s positions in spite of further flows of data supporting the dollar. However, rising energy costs threaten not only the U.S. economy, but also emerging economic improvements in the eurozone. August PMI Manufacturing in the eurozone is likely to be the key on Thursday, clarifying the resistance of European economies to oil price spikes. U.S. inflation data in July and ISM Manufacturing for August due for release Thursday should not be ignored either. We expect that with downbeat eurozone economic statistics, the dollar may stay close to its current levels of RUR 28.4-28.5. Bond market The first day of autumn offers a number of favourable factors for rouble bonds. Moscow banks , excess reserves are again over RUB 200 bn, and as key players on the domestic bond market, the banks are likely to park some of this liquidity into papers. Moreover, the rouble is set to strengthen against the dollar following Wednesday ,s euro gains, making dollar-calculated returns more attractive. Finally, falling global yields may be felt on the domestic fixed income market as well, although the correlation between Russian Eurobonds and rouble debt might not be strong. Strong financials posted by mobile telecoms seem to have triggered some revaluation of Vimpelcom and Megafon papers. Meanwhile, Nortgas bonds now yield just under 9% to maturity in November of this year, as the market perceives the gas producer ,s creditworthiness as having been restored thanks to the company ,s deal with Gazprom. It should be noted, however, that the deal has still not been closed. Russian Eurobonds keep on surging, buoyed by strong demand for all the bonds on generally worsening market expectations about U.S. economy expansion. As noted in the minutes of the FOMC ,s last meeting, rising energy costs jeopardize consumer spending and, thus, the sustainability of long-term economic growth. The number of oil facilities put out of order by Hurricane Katrina increases the probability that the oil price will remain at record highs for a longer period, which may translate into a slowdown later this year. That said, we do not rule out the possibility that demand for Russian Eurobonds may continue to expand, pushing yields to the new record lows in the coming days. The credit spread will likely continue to tighten, with the EMBI+ Russia approaching 120 bps. Much poorer that expected Chicago PMI and revision to the downside of 2Q ,05 GDP in the United States has encouraged investors into the fixed-income markets. The yield of Russia ,30 fell to 5.35% loosing an impressive 14 bps on the day, while the yield of 10-year UST lost 7 bps to hit 4.02%. The EMBI+ Russia index contracted 5 bps to hit 129 bps. Equity market The equity market is likely to test new highs on Thursday on the back of strong performance from Asian markets in the morning. Wednesday ,s intraday dynamics suggest that there is plenty of confidence among the bulls on the market * weaker performance at the opening simply caused investors to pick up stocks more cheaply. The RTS index finished the day up 0.13% at 882 on strong combined volumes of USD1.2 bn. End-of-month tax payments have passed, suggesting that more domestic liquidity will be available to flow into equities. In New York, crude oil futures slipped below USD69/bbl and in London the Brent spot dropped by 1.2% to USD66.68/bbl. on news that the White House is ready to release some oil from the Strategic Petroleum Reserve.
ING Wholesale Banking Russia Russian Fixed Income Daily
- Moscow curve still offers large spread over OFZs
- CenTel-4 growth supports positive view for Pyaterochka
- Buy Salavat-2, YTM target 8.6%...
FX and money market Yesterday, due to end of month effect in the money market we saw a short-lived overnight interest rate spike to 6%, however, now from the beginning of new month, it is staying around 2%, while the Russian bank balance is continuing to rise to RBL316.6bn. We believe that money market conditions will stay in a good shape till mid-September as there are no other tax payments scheduled for this period. In the FX market, the rouble traded around RBL/US$28.56 on average trading volumes. However, towards the evening the euro rebounded showing its strength against the dollar on the back of the revised and downgraded US 2Q05 GDP figures. As a result, currently the euro is trading at US$/EUR1.2338 which immediately pushed the rouble up to RBL/US$28.46. Today we expect the local currency to remain under the pressure of the euro performance and to see the rouble in the range of RBL/US$28.44-28.49. At the same time, scheduled for tomorrow US changes in non-farm payrolls could strongly influence on the euro/dollar trend. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Wednesday demonstrated reduced exchange turnovers compared to a very active Tuesday. Price action was again mixed: OFZs and high-grade corporate bonds remained unchanged, while munis and second-tier corporates were growing reasonably. Upward movement on the local debt market was capped, as the recent large tax payments and the end-of-month effect were keeping short-term rouble rates at increased levels: 1-day MIBOR is now at 4.74%, significantly higher than its ‘normal’ level, located close to 2%. However, today we should see a significant improvement on the money market, as the balance in correspondent accounts of Russian banks is expected to reach its monthly high usually observed on the first day of every month. US Treasuries continued supporting the local market yesterday, as on the very weak Chicago PMI index release US10Y bumped into 4%, though having not broken it downwards. We expected this event a bit later, and anticipated that by the time US10Y approaches 4% the upward sloping yield support line limiting the growth of 10-year Treasuries will also be located closer to 4%. But currently the yield support is at 3.9%, which suggests US10Y still has room for further growth. Anyway, right now US10Y is at 4.03% against 4.09% yesterday, and Russia’30 is at 114.375, having surpassed our goal 114 set for it in mid-August. If US10Y reaches 3.9% level in the immediate future and the spread 130bp over it is retained, Russia’30 will reach 115.5. Government bonds Not much has been happening here recently, apart from the very slow growth on the long end of the curve. Yesterday OFZ 46018 was located at 7.57% to maturity in 16 years, having descended in yield by more than 1% within 1 month. As we do not see any specific reasons, why OFZ yields should further go down, we currently do not recommend playing speculative games with long government bonds, although understanding that a downward correction in them appears to have a very low probability, at least in the first half of September. Tomorrow, September 2, MinFin is planning to sell to the market the remaining parts of OFZ tranches that were not fully placed previously. The offered volumes are: RBL0.23bn of OFZ 25057, RBL0.13bn of OFZ 25058, RBL0.65bn of OFZ 46017, RBL0.06bn of OFZ 46018. As can be seen, the sizes are quite small, so they should not significantly affect the pricing of corresponding OFZs. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +20bp, MosReg-5 +4bp, Novosibirsk-3 +47bp. Moscow-39 continues its growth: yesterday the bond reduced its yield to 7.66%, which is already quite close to our current target 7.6%. Nevertheless, if we look at spread charts, it becomes clear that the paper is still significantly undervalued relative to the OFZ curve: its spread over OFZ 46014 is 26bp, while in the beginning of August it was almost equal to zero. We maintain a Buy recommendation regarding Moscow-39. The process of Moscow spread compression should affect not only Moscow-39, but also shorter Moscow bonds. We specifically recommend Moscow-39, as it is the longest issue providing the largest capital gains and at the same time being the most liquid bond in the sector. However, if more exposure to Moscow is necessary, Moscow-36, 41 and 38 also appear very attractive. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-4 +10bp, Lukoil +2bp, RZhD-3 -25bp, FSK UES +1bp. Second-tier bonds: Megafon-3 +21bp, Salavat-2 +27bp, CenTel-4 +64bp, ChTPZ +0bp. Significant growth of CenTel-4, which is currently yielding 8.73% to maturity in 4 years, supports our view that its peer bond Pyaterochka should trade at least at 8.75%, as the latter is better than CenterTelecom from a credit point of view. We maintain a Buy recommendation for Pyaterochka. Also, Salavat-2 is currently yielding 8.94% to maturity in 4 years, which is significantly worse than CenTel-4 and NKNH-4 (8.5% for 3.5 years). We believe that Salavat-2 can reach level 8.6% in the nearest future, which promises a price upside of 100bp. We are adding Salavat-2 to our Buy list. In the second-tier segment we also are maintaining a Buy recommendation regarding ChTPZ, which was yesterday trading at 8.66% to put in 3 years, while our target for the bond is currently located at 8.4%. Short term market view As we mentioned earlier, the market should see a reduction of the liquidity deficit already today. In addition, strength of Russian Eurobonds supports the local debt market. In such conditions increased portfolio duration should help better capture the capital gains we are expecting in the first half of the month. Dmitry Dudkin, Moscow (7 095) 755 5480 Mechanism of government guarantees From 2006, the new mechanism of government guarantees will result in additional US$13.6bn of investments In 2006, a government investment fund will be established and receive RBL70bn (US$2.5bn) from the budget. This fund should be used to increase investments into infrastructural projects. Now the government went further and developed the new mechanism of government guarantees, which should help to expand these investments. According the instruction on the investment fund, the government will guarantee up to 60% of loans for investment projects. The government will also reserve 30% of each issued guarantee. This guarantee scheme will help to expand investments more than in the case of the direct government financing of projects. For example, if the project is estimated US$1bn, the government will guarantee US$0.6bn. Taking into account the reserve rate of 30%, the investment fund will actually spend US$0.18bn. This simple calculation shows that having RBL70bn (US$2.5bn) in investment fund in 2006, the government could boost investments by RBL389bn, or US$13.6bn. Although we welcome the mechanism of guarantees in general, which potentially may very significantly increase investments, all problems related to the government investments remain in place. It is not clear how the government will select projects for the new scheme and whether these projects will be the most efficient ones. In addition, inflationary consequences could also be substantial. Investment implications: The new scheme of government guarantees could help to boost investments already in the short-run by 10-12% of their total volume. However, currently it is not clear whether the government will manage to improve its efficiency as an investor (past experience has been rather poor). In addition, as the government creates the investment fund on the expense of the stabilisation fund, inflationary consequences are unlikely to be avoided. Julia Tsepliaeva, Moscow (7 095) 755 5489
VTB Capital Russian Manufacturing PMI
August 31, 2005
B&N Bank MDM Fixed Income Daily
Here by our current interest level in USD bonds / can be changed during the day. Better sellers: ALROSA\'14, MTS\'08, SEVST\'14 All prices are subject to call
Raiffeisen Bank Russian Daily Monitor
MTS published 1H05 results MTS posted relatively strong financials under U.S. GAAP on Tuesday, although, as expected, the improvement in results was lower than those of Vimpelcom. MTS , sales grew 17% q-o-q to USD 1.23 bn, mostly because of seasonal factors, subscriber base growth and appreciation of the Ukrainian currency (the company bills its Ukrainian subscribers in hryvnyas). The result is above both our expectations the consensus, but the quality of the improvement is not as positive. Unlike Vimpelcom, MTS has not managed to force subscribers to talk more: the number of minutes of usage (MOU) dropped 3%, while Vimpelcom ,s equivalent statistic grew 14%. The company ,s costs grew 12% q-o-q to USD 802 mn. Unlike Vimpelcom, MTS , subscriber acquisition costs remained unchanged in Russia, pressuring margins. In 2Q05, the company ,s operating and EBITDA margins stood at 35.2% and 52.7% respectively. On a y-o-y basis, the company continues to show deteriorating margins: operating margin slipped from 39.3% in 1H04 to 33.7% in 1H05, the EBITDA margin declined from 55.7% to 51.8%, and the net margin decreased from 28% to 23%. Meanwhile, Vimpelcom showed its best-ever EBITDA and net margin figures in 2Q05. Overall, the results were good, but only a minor part of the improvements can be explained by the company ,s efforts. MTS, as the company ,s management has already reported, should end the year with an EBITDA margin above 50%, but Vimpelcom may take leadership in EBITDA margins from MTS. MTS , management said that the 2005 capex should not exceed USD 2 bn, and that is good news as the company previously cited a figure of about USD 2.2 bn. While the results were above consensus, MTS , share price declined as the company is steadily losing its leadership in margins to its main competitor ) Vimpelcom. That is in line with our expectations, and we would recommend investors rebalance their mobile portfolios in favour of Vimpelcom. Money market Upcoming data releases from the United States and Europe are the key events to watch on Wednesday as the local FX market remains under the influence of global trends. Tuesday ,s rise in the U.S. consumer confidence index was better than expected after disappointing Michigan confidence index figures released four days earlier. Upbeat consumer sentiment amid surging energy prices was buoyed by improving job prospects and rises in real incomes. However, the release did nothing for the dollar. To some extent that confirms that dollar is close to its upper bound and further good news from the United States has already been priced in. Further dollar strengthening against the euro will likely much depend on weakening of the eurozone economy. Thus PMI Manufacturing figures for the eurozone due on Thursday should have more impact on short-term euro-dollar dynamics than the figures due for release in the United States on Wednesday. The rouble will follow any movements in the heavyweights according to the Central Bank ,s currency basket rules. Bond market As liquidity continues to recover with overnight money market rates gradually returning to their usual 2%, the rouble bond market is likely to reap the benefits. While concerns regarding dollar strengthening are easing a bit as oil price reach new highs, market sentiment is likely stay upbeat and we do not expect any downturn in the coming days. Second-tier bonds still represent the most attractive investment opportunities with the potential for yield tightening on the back of strong demand. Following the benchmarks, the Russian Eurobond market continued its surge on Tuesday approaching its lowest-ever yields. The move was enhanced by worries that high oil prices would hinder economic expansion and the U.S. Federal Reserve would halt its tightening. The view was backed by the minutes of the FOMC meeting on August 9 released Tuesday, in which the risks of rising energy costs to long-term economic growth were mentioned. That, in turn, made the Fed lower its economic growth projection for the next year. Amid the Federal Reserve ,s statements that inflation expectations remain contained (despite surging oil price, wages have not risen quickly and companies have been unable to transfer energy costs to end consumers) the expressed concerns about economic prospects over the long term should continue to provide support for the bond market. Thus we believe Russian Eurobonds may show further yield tightening in the near future backed by strong demand for U.S. treasuries. On Tuesday the yield of Russia ,30 lost 3 bps to hit a record low 5.48%, while the yield of 10-year UST slipped 8 bps to 4.09%. The Russian sovereign credit spread widened to 134 bps, up 2 bps on the day. Equity market With Hurricane Katrina inflicting considerable damage to oil facilities in the south of the United States, the Brent spot in London climbed 4.1% to USD 67.49/bbl while in New York crude futures hit USD70.27/bbl. We believe this spike in oil prices should trigger another wave of enthusiasm on the Russian equity market. The stock to watch on Wednesday is juicemaker Lebedyansky *the company is expected to publish strong 1H05 financials today, driven by both volume and prices increases in its juice and baby food units. We believe this stock offers the best value in the consumer sector, trading at a discount of 30% on its emerging market peers. On Tuesday the benchmark RTS rose 0.6% to 880.87 on solid combined volumes of USD 1120 mln. Apart from Sibneft, which backtracked earlier gains, falling 1.7%, oils performed well: Tatneft shot ahead 3.8%, Surgut followed suit, up 1.7% while Transneft prefs finished up 0.9%, and Novatek climbed 0.5%. A similar picture was visible in oil and gas ADRs on other bourses: Gazprom added 0.5%, Surgut surged 4.1%. Trading in telecoms was mixed, with mobiles under pressure from the publication of MTS 1H05 financials, which though optimistic, proved worse than those of major rival, Vimpelcom (see story above). As a result, MTS dipped by 2.8%, while Vimpelcom closed down 0.4%.
ING Wholesale Banking Russia Russian Fixed Income Daily
- IrkutskReg downgraded to Sell on reaching 7.75%
- AvtoVAZ-3 enters secondary trading: outlook - neutral
- Gazprom-5 added to Buy list, target 6.5%...
FX and money market Money market conditions have been gradually improving since the massive tax payments made last week. Yesterday, overnight interest rates descended to 3.5% and the Russian bank balance reached a rather healthy level at RBL288.5bn. In the FX market, as expected the rouble depreciated to RBL/US$28.56 on the back of euro’s downward correction to US$/EUR1.22. Today we expect the market to remain volatile with the rouble trading in the range of RBL/US$28.54-28.60. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Tuesday demonstrated a significant increase in trading activity compared to the rather slow Monday, which, however, did cause a notable price growth. Again, the market dynamics were somewhat mixed: price changes for municipal bonds and second-tier corporate ones were positive, while OFZs and high-grade corporate papers basically remained unchanged. Traders’ enthusiasm was yesterday capped by high money-market rates that were again above their ‘normal’ level due to the recent tax payments and also to the resumption of the euro depreciation. Right now 1-day MIBOR is at 4.25%, almost 1% lower than yesterday, but still quite high. As there are no other tax payments scheduled for the next two weeks, we expect the money market conditions to normalize already in the first few days of September. On the other hand, US Treasuries were yesterday supporting the bond markets throughout the world: after some lingering US10Y continued its downward drift in yield and descended from 4.16% last morning to 4.1% today. This took Russia’30 to another historical high, as now the Russian benchmark is quoted 113/113.5. Russia’30 is currently moving precisely parallel to US10Y, with a constant spread of 135bp. As we have already mentioned many times in our updates, we believe that US10Y should reach level 4% in the beginning of September. This, in turn, will take Russia’30 to 114. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +33bp, MosReg-5 +15bp, IrkutskReg +13bp, Yakutia-6 +35bp. As indicated, IrkutskReg (B from S&P) grew yesterday 13bp and reduced its YTM to 7.73%, which is below our target 7.75%. We do not believe the bond is looking attractive below this level, so we are downgrading IrkutskReg to Sell. Our current general recommendation regarding long bonds is a Buy, so holding well-performing medium-term assets (IrkutskReg has 23 months to maturity) contradicts our general idea of increasing portfolio duration. Moscow-39, the longest bond on the Moscow curve, gained 33bp on Tuesday, the most since August 16. We believe this growth marks the start of the movement towards significant reduction of the spread between Moscow-39 and corresponding OFZ 46014, which still equals 34bp, compared to almost zero a month ago. We maintain a Buy recommendation regarding Moscow-39, while our target for its YTM is located at 7.6%. Corporate sector Yesterday a regional oil trading company Udmurtnefteproduct (UNP) placed its debut rouble bond with a size of RBL1.5bn. The issue has 11 coupons, the first one of them being semiannual, the rest – quarterly. The bond will be traded to a 15-month put option, and the coupon rate for the first 5 coupons was set at 9.5%, which gives a YTP of 9.79%. Currently we are not covering the company, so we did not provide any auction guidance for it. Price changes of corporate benchmarks in secondary trading: Gazprom-4 -15bp, Lukoil +1bp, RZhD-3 -1bp, FSK UES -3bp. Second-tier bonds: Baltika -16bp, Megafon-3 +5bp, Pyaterochka -8bp, UrSi-4 +12bp, CenTel-4 +20bp, ChTPZ +0bp. AvtoVAZ-3, the RBL5bn issues of the Russian car maker, entered the secondary trading yesterday. Over the day, the bond demonstrated a turnover of RBL4.1bn, which was mainly the result of delivery of forward contracts for it. The paper was trading at 8.78% to a 10-month put and now appears fairly valued. Therefore, we have a neutral view for it so far. Together with a very short Gazprom-3, Gazprom-5 (6.74% to maturity in 2 years) is looking increasingly attractive: its spread to the OFZ curve is now close to 70%, while in the beginning of August it was seen at 25-30bp. We believe that in the nearest future the bond can easily reach YTM level 6.5%, which promises a price upside of 45bp. In the second-tier segment we are maintaining two active Buy recommendations: regarding ChTPZ, which was yesterday trading at 8.66% to put in 3 years, while our target for the bond is currently located at 8.4%, and also for Pyaterochka, with a YTM target 8.75%. We believe that the latter should trade at a discount to CenTel-4, which is now yielding 8.92% to maturity in 5 years. Short term market view We believe that any price falls we should see now must be used to top-up the portfolio with longer duration bonds. Growth of Russian Eurobonds and reduction of the rouble liquidity deficit should take prices on the local debt market higher within next couple of weeks. Dmitry Dudkin, Moscow (7 095) 755 5480
Alfa Bank Alfa Bank\'s Weekly Report
Our expectations: ь Exchange and money markets US GDP data and the PCE deflator will help to confirm or alleviate investors? anxiety over a possible slowdown of the US economy due to inflationary pressures, and will in turn determine the movement of the dollar against the euro and the ruble. With the end of the tax payment period, money market rates will now return to a level of 1-2% p.a. ь Ruble bonds market With the completion of the tax payment period and thanks to a higher volume of settlements in the corporate and municipal bond segments this week (amounting in total to R4.9 bln), the state of ruble liquidity will cease to restrain prices on ruble-denominated bonds. ь Eurobond market Debt market dynamics this week will be determined by the persistence of investor anxiety concerning the potential slowdown of US economic growth amid high inflation. The spread on Russia-30 against the 10-year UST will remain in the 135-140 bpts range.
August 30, 2005
B&N Bank MDM Fixed Income Daily
Raiffeisen Bank Russian Daily Monitor
Solid 2Q05 results expected from MTS MTS, Russia ,s leading mobile operator, is to announce 2Q05 financials under U.S. GAAP on Tuesday. We expect the company to demonstrate solid gains in sales and margins, but the improvement is unlikely be as good as that of rival Vimpelcom. We expect 15.5% q-o-q growth, mainly because of seasonal factors, the appreciation of the Ukrainian currency and improvement in the quality of the company ,s subscriber base. The bottom line is expected to add 23% q-o-q. We expect only minor improvement in margins: the EBITDA margin is expected to add 1.2 pps to 52%, and net margin should reach at 23.4%, gaining 1.4 pps ) well below the 3.5 pps improvement in Vimpelcom ,s net margin. We think MTS , results should be greeted positively on the market, and we would expect a rally in Russian mobiles to follow. Money market The euro slipped to USD 1.222 overnight, a move that pushed the greenback above RUR 28.5 on the local market on Tuesday. Further moves by the global heavyweights would require the impetus of economic releases, however, as the current euro-dollar equilibrium seems more or less stable, undermining the influence of technical factors. Tuesday ,s key release should be August data on consumer confidence in the United States. There is rising speculation that the indicator may fall after the weaker )than-expected reading from the University of Michigan confidence index released Friday. We would not rule out the possibility that the dollar may claw a few more cents back against the euro in the coming days on strong manufacturing expansion and employment data due this week. That in turn would lift the rouble-dollar rate close to 28.6. However, both the strong U.S. data and expectations of more have already been priced in. Considering positive signs emerging from the eurozone, a new greenback surge to the levels of early July seems unlikely. Bond market Tuesday is finally likely to see relatively strong liquidity, providing support for rouble bonds and turnover on this market. We expect overnight interest rates to return to their usual level of 2%, with intraday volatility also visibly decreasing. Expected weakness from the rouble on Tuesday could lose the domestic debt market a few bids, however. There is currently substantial demand in second-tier papers, especially metals, with a tendency for compressing yields after benchmarks and blue chips moved ahead last week. While risks of a moderate temporary correction across the board at the start of the month remain, in our view, this should not obscure the attractiveness the market offers longer-term investors. Tuesday will see the single placement scheduled this week ) RUB 1.5 bn from Udmurt Oil Product. The recent surge in oil prices to new record highs combined with disappointing figures from the University of Michigan confidence index released Friday gives grounds to expect a drop in U.S. consumer confidence figures when they are released on Tuesday. Such sentiment buoys fixed-income markets as concerns regarding aggressive or prolonged interest rate hikes from the Federal Reserve ease. We do not expect significant moves on the Russian Eurobond market on Tuesday, while benchmark dynamics are set to remain under the influence of upcoming data releases. Thus, in case of weaker-than-expected readings on consumer confidence on Tuesday, some widening of the Russian sovereign credit spread is likely. The scheduled release of the minutes of the last FOMC interest rate decision will also attract attention. However, any surprises in terms of strategy or outlook from the monetary authorities looks unlikely. On Monday the EMBI+ Russia index widened by 2 bps to hit 132 bps on the back of a slight appreciation both in Russian Eurobonds and benchmarks. The yield of Russia ,30 dropped 2 bps to 5.51% while the yield of the 10-year UST clocked in at 4.17%. Equity market With London on holiday, Monday was quiet on the Russian equity market. Domestic investors boosted the RTS by 0.4%, to see the index close at 876.05 on low volumes. There was some demand for Russian oils on high crude prices: Tatneft surged 3%, Surgut added 1.6% and LUKoil grew by 0.8%. The majority of second tier stocks, on the other hand, showed no movement whatsoever, with only a few ending the day with slim gains. In New York, there was solid demand for Russian ADRs: Lukoil climbed 2.22%, Surgut gained 1.1%, while Norilsk Nickel was up 2.18%. MTS and Vimpelcom rose 0.9% and 0.1%, respectively, on expectations of decent 1H05 results from MTS on Tuesday. The WTI spot added 1.07 in New York to USD 67.2/bbl, well below the high of USD 70/bbl as investors , anxiety about possible damage in the Gulf of Mexico from Hurricane Katrina proved to be overstated. Delayed demand from London, impressive performance of Russian ADRs and strong EMEA indexes should support the Russian equity market on Tuesday. However, it looks like oil will remain the only trade idea, and non-oil investors may prefer to take profits. MTS , results may trigger some demand for Russian mobiles. As for other non-oils, we expect little movement on the absence of significant news.
ING Wholesale Banking Russia Russian Fixed Income Daily
- Yakutia-5 downgraded to Sell, Buy for IrkutskReg maintained
- FSK UES reaches our target 7.15%...
FX and money market Yesterday, Russian companies paid their profit tax causing a shortage of rouble liquidity, spiking the overnight rate to 5 %. Taking into account seasonal effects related to the end of the month and recent huge tax payments, today and probably tomorrow we do not rule out a liquidity gap in the money market. However, from the beginning of September interest rates will return to their regular level. For the FX side, the majority of coming exports proceeds were spent on the above mentioned payments and, as a result, upward pressure on the rouble took place – it was bounded at RBL/US$28.43-28.46. On the other hand, close to the evening the euro lost its position against the dollar falling to US$/EUR1.226 and consequently the rouble dropped to RBL/US$28.483. Today the euro is continuing to slide and we can see a weakening of the rouble to RBL/US$28.51-28.55. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Monday is usually the slowest day of the week, so trading activity on the local debt market was quite limited. This was especially evident in the government sector, while corporate securities demonstrated moderate, but notable exchange turnover. In spite of this slowdown, the market managed to grow marginally yesterday, which was even surprising, considering the jump in short-term rouble rates that was expected to diminish demand. This market strength in hard conditions supports us in our opinion that further price appreciation in the first half of September is very likely. Profit tax payment – the last liquidity drain in August – reduced the money supply to the financial system yesterday taking 1-day MIBOR as high as 5.22%, which was its highest level this month. As there will be no more tax payments in the next couple of weeks, we expect the money market to quickly return to its ‘normal’ state, as a result of which MIBOR should drop to about 2% in the first days of September. US Treasuries were moving very slowly yesterday having slightly corrected downwards: US10Y moved in yield from 4.14% in the morning to 4.16% now. Nevertheless, we believe that American bonds are presently in an upward movement that is expected to take US10Y to level 4% in the first half of next month. It should be noted, however, that this Friday an August job report will be published in the States, and that can significantly influence the dynamics of US Treasuries in any direction, being the major source of uncertainty this week. Russia’30 is currently at its historical high, being quoted 112.5/113. Its spread over US10Y is basically the same 133bp, so if US10Y reaches 4%, Russia’30 will be traded at 114. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +19bp, MosReg-5 -2bp, Yakutia-5 +46bp. As shown, Yakutia-5 (B+ from Fitch) grew 46bp yesterday reducing its YTM from 7.92 to 7.59%. Our target for it was located at 7.75%, so over a day it was not only reached, but significantly surpassed. Taking this into account, we recommend selling Yakutia-5 with an idea of switching into longer bonds, e.g. Moscow-39. The latter grew yesterday 19bp and was trading at 7.75%. However, its spread over OFZ 46014 still remains close to 35bp – largest since January 2005. Therefore, we maintain our Buy recommendation regarding Moscow-39 with YTM target 7.6%, which now promises further price upside of 95bp. The dramatic performance of Yakutia-5 makes us believe our Buy recommendation for IrkutskReg (B from S&P) can also perform quite well. The bond is now yielding 7.84% to maturity in 2 years, and we believe it remains attractive as a mid-term vehicle above 7.75%. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-4 +2bp, Lukoil +0bp, FSK UES +8bp. Second-tier bonds: Megafon-3 +25bp, Rosbank +3bp, UrSi-4 -6bp, CenTel-4 +16bp, ChTPZ +0bp. As indicated, FSK UES grew yesterday 8bp and was trading at YTM 7.15%, which is exactly our target set previously for the bond. The paper has ceased looking cheap now, so we are downgrading it to Hold. FSK UES has a potential to reach level 7% in the immediate future, but this upside is now less certain. In the second-tier segment we are maintaining two active Buy recommendations: regarding ChTPZ, which was yesterday trading at 8.66% to put in 3 years, while our target for the bond is currently located at 8.4%, and also for Pyaterochka, with a YTM target 8.75%. We believe that the latter should trade at a discount to CenTel-4, which is now yielding 8.98% to maturity in 5 years. Short term market view Our general recommendation for long rouble bonds was changed yesterday from Hold to Buy. We believe it is time now to start increasing the overall portfolio duration, as paper deficit and low money market rates are likely to result in another wave of market growth in the first half of September. Dmitry Dudkin, Moscow (7 095) 755 5480 Further debt pre-payments The MoF intensifies negotiations on pre-payment of non-Paris Club debt of the former USSR of US$6.1bn Russia wants to continue pre-paying its foreign debt to sovereign creditors, not included in the Paris Club. In 2000, this debt amounted to US$19.8bn and significantly dropped to US$6.2bn now on the back of bilateral negotiations and pre-payments (Russia’s main creditors of this part of the debt are South Korea (US$1.3bn); the UAE and Kuwait (US$0.8bn)). The Finance Minister Alexey Kudrin announced that Russia could pre-pay this debt in full. Although the MinFin said nothing about timing, we believe that it could be done by the end of 2005 as bilateral negotiations intensify after Russia reached agreement with the Paris Club in 1H05. In addition, Russia would like to pre-pay so-called “loans from foreign banks and firms” – relating to London and Tokyo Clubs. Russia estimates this debt at US$2.2bn. However, taking into account experience with the FTO debt, the process of verification is unlikely to be easy, increasing uncertainty of the negotiation process related to this debt. Investment implications: Solid fiscal performance (budget surplus is unlikely to be lower than 5% of GDP in 2005) and the high stabilisation fund accumulation strongly stimulates Russia for further pre-payments of its foreign debt. We welcome this idea and believe the pre-payment of non-Paris Club debt is realistic in 2005. Pre-payments will help to reduce the debt burden below 17% of GDP, thus reducing the inflationary consequences of high oil prices and assure purposeful spending of the stabilisation fund. Julia Tsepliaeva, Moscow (7 095) 755 5489
ING Wholesale Banking Russia Russian Fixed Income Weekly
Rouble Bond Market Last week was quite a calm one, with exchange turnover in all market sectors being at the average level for recent weeks, and price movement being on average marginally positive. Second-tier corporate bonds were during the week the best performers, munis and government papers also gained a little bit, while high-grade corporate bonds were basically unmoved. We expected a liquidity squeeze to happen last week due to large tax payments, and it basically took place, although it was much less severe this time, than in July or June. On August 22 and 25 Russian companies were paying to the government the VAT and the mineral resource tax correspondingly. Also, the profit tax payment is was due today. On these payments, 1-day MIBOR almost reached level 5%, which is significantly higher than its ‘normal’ level 2%. On the other hand, in previous months the figure was even larger, surpassing level 5%. In short, this month the squeeze was rather mild and did not cause any significant price disturbance, though succeeded in stopping the rally that took place on the local debt market in the first half of August. No more significant liquidity drains are expected on the money market until mid-September, so we believe that the money market rates should in the next few days quickly drop to reach their low levels in the beginning of September. US Treasuries were moving up last week, with US10Y reducing its yield from 4.2% last Monday to 4.14% today. The pace of their growth was quite slow, but we believe US10Y is definitely heading towards level 4%, which should be reached by it in the first half of September. Correspondingly, fuelled by the growth of Treasuries, Russia’30 was demonstrating new price highs: now the benchmark is quoted 112.5/625, while in the beginning of last week it was trading below 112. Again, the growth here was very limited, but still provided good support to the local market. We believe that as US10Y reaches level 4%, Russia’30, trading at 130-140bp over it, should jump as high as 114. Government Bonds Last week there were no primary placements in the OFZ sector. At the same time, the only process that was really evident in secondary trading, was a continuation of growth on the long end of the OFZ curve. Price leaders for the week: OFZ 46018 +66bp, OFZ 46017 +26bp, OFZ 46014 +25bp. As we can see, this is just a list of the longest OFZs, in the order of descending duration. Right now it is really hard to say for sure, if the downward movement of the OFZ curve can continue. In the MinFin programme for internal borrowing in 2006 it is stated that the ministry sees long-term OFZ rates below level 8.5%. But OFZ 46018 – the longest bond on the curve – is already trading at 7.6%. On the other hand, the current yield curve shape suggests there’s a possibility of another step down in yield – below level 7.5%, maybe up to 7.25%. Therefore, as the market is currently in a very good shape and external factors are mostly positive, we would advise to simply hold the long OFZs that are currently present on position. Accumulation should be done mostly at primary placements that usually provide better earning opportunities than simple buying on the secondary market. The next officially scheduled primary placement of OFZs will happen on September 14, when another RBL6bn of OFZ 46017 and RBL8bn of OFZ 46018 will be offered to the public. Municipal Sector Volume leaders in the sector in secondary trading over the week: Moscow-39 RBL3.6bn, Moscow-32 RBL1.6bn, Moscow-31 RBL1.5bn, MosReg-5 RBL1.4bn. Price leaders: Moscow-37 +42bp, Moscow-39 +25bp, Moscow-40 +16bp. Upward movement in Moscow Region bonds basically stopped: MosReg-4 +5bp, MosReg-5 -3bp, as these bonds currently offer a spread of only 40-50bp over the Moscow curve, being significantly inferior in credit quality (Moscow – Baa3/BBB-, Moscow Region – Ba3/BB-). We believe that Moscow-39, the longest bond on the curve, remains the most attractive investment in the sector. The paper is now trading approximately 35bp over OFZ 46014, while only a month ago this spread was virtually zero. In the situation of severe paper deficit, especially among liquid issues, market participants will have no other options, as to buy Moscow-39, which readily offers spread compression potential. In yield, the bond is now close to level 7.78%, while our target for it is located at 7.6%. This corresponds to a price upside of 110bp. Among non-Moscow issues that are currently looking undervalued we can name IrkutskReg (B from S&P, 7.94% for 2 years) and Yakutia-5 (B+ from Fitch, 7.92% for 2 years), that both have a potential to decline in yield to at least 7.75%. Corporate Bonds Primary market in the sector was basically empty last week. Volume leaders in the sector in secondary trading: AvtoVAZ-2 RBL2.3bn, Газпром-4 RBL1.4bn, CenTel-4 RBL1.3bn, Evroset RBL1.1bn, RZhD-3 RBL1.1bn. Price leaders for different time horizons are displayed in the table below: Over 7 days Over 14 days Over 1 month CenTel-4 +75bp KrVostok +134bp Pyaterochka +351bp Volga +74bp Volga +136bp CenTel-4 +303bp OMK-1 +69bp OMK-1 +111bp KrVostok +277bp As a general trend, we believe that second-tier issues will continue yielding more to holders in September than high-grade securities. With this in mind, we recommend ChTPZ as a very attractive purchase. Currently, the bond is yielding 8.67% to put in 3 years, paying a premium to similar bonds, like OMK, which is trading at 8.3% for the same term. We believe that ChTPZ will be able to reduce this premium to almost zero in the nearest future, so we are locating our target for the bond at 8.4%. Also, we believe Pyaterochka is looking attractive at its current 9.15% to maturity in 5 years. By credit quality, it should definitely trade at a discount to its peer bond CenTel-4, which is currently yielding 9.03%. So, we locate our target for the YTM of Pyaterochka at 8.75%. Market View for Coming Weeks We believe time has come now to start increasing the overall portfolio duration. Money market conditions are likely to significantly improve in the nearest future, Russian Eurobonds should continue their growth, so main external drivers are indicating more capital gains are to come on the local debt market in the short-term perspective. The positive period is expected to last at least until mid-September, therefore market participants have enough time to prepare their positions for market growth.
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