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Source Research
September 01, 2005
Banco Bilbao (BBVA) Yield Curve Analysis in Brazil
Description
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
Description
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
Description
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%...
Description
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
Description
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
Description
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%...
Description
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
Description
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
Description
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%...
Description
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
Description
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.
August 29, 2005
Raiffeisen Bank Russian Daily Monitor
Description
Money market With few expecting the rouble to stop tracking euro-dollar dynamics in the short term, we foresee a weakening euro bringing a stronger dollar against the rouble. The trend may be backed by upcoming figures this week on consumer confidence, Chicago PMI, ISM manufacturing and employment data in the United States. According to consensus forecasts the data should confirm the increasing momentum in the world ,s largest economy in the second half of the year. Meanwhile, the decision of the European Central Bank on interest rates due on Thursday is unlikely to bring surprises, with the target rate likely to clock in at 2%. The eurozone PMI manufacturing in August is scheduled for release on Thursday with median expectations pointing to minor improvements. However, we consider the likelihood of a euro rebound against the dollar to be small while a reverse trend would be more likely. We do not rule out a rouble-dollar rate return to 28.6-28.7 this week. Bond market Rouble bonds mostly stood firm Friday on the back of returning liquidity and resumed rouble appreciation. The papers have weathered this month ,s tax time quite well, having shown no significant price declines over the last week (only the profit tax payments are left, due Monday). Hence, with no technical weakness to correct, domestic debt is unlikely to post impressive gains in the short term. Rouble liquidity and the exchange rate remain the two key fundamental factors, and now seem to be acting in opposite directions, ensuring no clear trend for the market as a whole. While the dollar is more likely to strengthen against the euro this week, undermining the rouble ,s position as well, liquidity should be supportive for rouble debt as long as oil prices stay high. The escalating corruption scandal in Brazil is still threatening the emerging debt market. However, the Russian Eurobonds market remained strong on Friday: the EMBI+ Russia spread narrowed 6 bps to 130 bps. Given the lack of clarity regarding the outlook of the United States economy, the yield of the benchmark UST ,10 added 3 bps and stood at 4.19%. The indicative Russia ,30 yield declined 2 bps to 5.53%. We expect the Treasuries market to be somewhat volatile in this week\'s news as it may bring some more insight into the United States macroeconomic situation. At the same time, with the absence of dramatic movements in the benchmarks, we expect the yield of Russian Eurobonds to remain stable given the good macroeconomic situation at home and the steady improvement of Russia ,s debt profile. Equity market Oil prices plummeted to just over USD 70/bbl on Friday in the U.S. in response to panic surrounding the approaching hurricane in the south of the country. This hike may trigger additional demand in Russian oil names Monday. Elsewhere, trading may be affected by the negative performance of major emerging markets indexes during the overnight session. On Friday, the benchmark RTS index experienced new highs, gaining 0.93% to 873 on a combined turnover of some $850 million. The majority of oil and gas papers closed in positive territory: Surgutneftegas added 3.5%, Gazprom ADS and locals rose 2.7% and 1.1%, accordingly, and Sibneft increased 0.7%. On the other hand, Sberbank prefs and ordinary shares dropped by 4.6% and 0.3%, respectively.
B&N Bank MDM Fixed Income Daily
ING Wholesale Banking Russia Russian Fixed Income Daily
- Recommendation for long bonds changed to Buy from Hold
- Moscow-39 - the most attractive among munis
- Target for ChTPZ - 8.4%, Pyaterochka - 8.75%...
Description
FX and money market Last week following the euro/dollar exchange rate the rouble was rather volatile with intraday fluctuations +/-5-12 kopecks and on Friday it reached RBL/US$28.45. In addition, problems with rouble liquidity caused by the huge tax payments, plus the end of month factor, created pressure for the rouble. The excess of rouble funds seen in the market at the beginning of the week were absorbed by the tax payments which pushed the overnight interest rate to 8-10% in the second half of the week. Today Russian companies will be paying profit tax (some RBL150 bn), the last tax payment this month and as a result, we expect money market conditions to still be tense. But from tomorrow the tax payment schedule is clean until mid-September. In the FX market, the rouble will be linked to the euro trend this week and today we see it in the range of RBL/US$28.41-28.46. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Due to problems with rouble liquidity, Friday, usually the strongest day in a week, turned out to be flat in price action and relatively slow in trading activity. All market sectors demonstrated no clear tendency with relatively small price changes. Because of the large tax payments last week and in anticipation of the profit tax payment today, money market dealers kept interbank rates high with 1-day MIBOR being now at 4.3% - approximately twice as higher as its ‘normal’ level usually observed at times of adequate liquidity. After today’s tax payment the market will not see significant liquidity drains until mid-September, which changes for our view for this primary driver of the local bond market for short-term positive. US Treasuries on Friday made a downward correction attempt: having opened at 4.16%, US10Y reached the level 4.2% by the evening, but failed to fall further and by this morning returned to lower yields, trading now at 4.14%. As we already said, we believe US10Y is currently targeting level 4% and promises to reach it in the first half of September. After that, further movement direction will depend on if the benchmark is able to break the upward sloping trendline support (on the yield chart) that has been limiting 10-year yields from below since June 2003. Right now, this support is located at 3.88%. Meanwhile, Russia’30 is floating strictly parallel to US10Y with a spread of 135-137bp. As the latter has been recently edging higher, Russia’30 has been establishing one historical high after another and should continue to do so in the immediate future, as we perceive the probability of the spread widening as very low. Right now the bond is quoted 112.375/8125. Our price target for Russia’30 is located at 114. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 -5bp, MosReg-5 -2bp, Yakutia-5 +4bp. As shown, Yakutia-5 (B+ from Fitch) grew 4bp reducing its YTM to 7.92%. We believe the bond can do much more: our target for it is located at 7.75%, and the latter can be reached within the next couple of weeks. Also, IrkutskReg (B from S&P) grew 14bp on Friday, having traded in yield as low as 7.94%. We also estimate the fair level for the bond at 7.75%, which promises a further price upside of 25bp. Our main trading recommendation in the sector now is a Buy for Moscow-39. Right now the longest paper on the Moscow curve (9 years to maturity) is at YTM 7.78%, while our target for it is located at 7.6%, which constitutes a price growth potential of 110bp. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-4 -1bp, Lukoil -4bp, RZhD-3 -25bp. Second-tier bonds: Megafon-3 -10bp, Pyaterochka +33bp, Rosbank +3bp, UrSi-4 +5bp, CenTel-4 +35bp, ChTPZ +9bp. FSK UES that we recommended as being for buying on Friday grew 28bp, descending in yield to maturity in 28 months from 7.32 to 7.19%. We believe the bond is looking attractive above level 7.1%, so we maintain a buy recommendation for it. Among second-tier bonds, we specifically favour ChTPZ (Chelyabinsky Tube-Rolling Plant), which entered secondary trading only recently and is currently yielding 8.67% to 3-year put option. We believe the bond can lower its yield to 8.4% in short-term perspective, which provided a price upside potential of 65bp. 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%. Short term market view Today we are changing our general recommendation for long rouble bonds from Hold to Buy. We believe the market should benefit in the short term from improvement in money market rates, further growth in Russian Eurobonds and a significant paper deficit, as the local market pipeline is still almost empty. Dmitry Dudkin, Moscow (7 095) 755 5480 Common Economic Space (CES): Russia, Kazakhstan, Belarus Legal base for CES union will be fully created in December 2005 and March 2006 The leaders of CIS countries met in Kazan (Russia) last Friday to celebrate the city’s millennial anniversary and discuss further perspectives of this union. It is clear that the CIS has fully completed its main target – the avoidance of violence/civil war scenarios in the USSR post-disintegration period. Despite all of the positive rhetoric about the CIS’s future, the summit decided not to discus any concrete plans of the CIS reforming but to create the special non-governmental ”Council of Sages”, which means that it will continue to drive the organisation in the direction of cultural and humanitarian cooperation. Nevertheless, economic integration continues in the form of bilateral cooperation and creation of new units. The summit gave a new breath to the CES union. Recently, Ukraine has confirmed that the country is not ready for full integration with the union and only wants to participate in the free trade zone project, which increased uncertainty regarding the union in general. Now the situation has become clearer. Russia, Kazakhstan and Belarus have decided to continue integration in line with the initial plan while Ukraine will have the possibility of joining the union later if the country changes its views on the issue (nevertheless, we believe this is not very likely).. Russia, Kazakhstan and Belarus are planning to sign three packages of documents to establish a fully functioning union. The first package of 29 documents is going to be signed by the end of 2005. By 1 March 2006 the core 15 laws should be approved, leaving some 49 documents for 2006-07. The leaders of Belarus, Kazakhstan and Russia sound very optimistic about further prospects of full integration – however, without Ukraine the project has significantly lost its economic value. Nevertheless, we welcome all efforts towards new forms of integration in the former USSR and believe we will see some practical results (first of all, trade turnover increase) in 2006-07. Investment implications: Despite the Ukraine’s decision to postpone (very likely, indefinitely) the participation in CES union, we welcome the efforts of Russia, Kazakhstan and Belarus to continue and intensify the integration process. We believe that positive impact on trade is possible already in 2006-07, which is good for economic growth in the region. Julia Tsepliaeva, Moscow (7 095) 755 5489
B&N Bank Russian CLN Market Data
August 27, 2005
Raiffeisen Bank Russian Daily Monitor
Description
Vimpelcom published 1H05 financials under US GAAP Vimpelcom published 1H05 financials under US GAAP Thursday which were well above even our optimistic expectations. The company managed to increase 2Q05 ARPU from USD 7.3 in 1Q05 to USD 7.8. The operator sales grew 20% q-o-q to USD 769.8 million, mostly due to the increase of average minutes of usage (MOU) and the exceptional subscriber base, which soared in 2Q05. Previously, we were worried about the company ,s phantom subscribers, which were expected to deflate ARPU and MOU. However, the quality of the company ,s subscriber base looks much better. Another reason for better-than-expected results is that Vimpelcom did not offer tariffs which could reduce call prices greatly. Costs added 13% to USD 512 million, mostly in line with our expectations. We expected slightly higher subscriber acquisition costs and SG&A expenses because of re-branding, but the company managed to control these costs. That said, SG&A expenses as a percentage of revenues declined from 35% in 1Q05 to 31.5% in 2Q05, suggesting that the marketing and advertising activity was expensive but efficient. Vimpelcom continues to demonstrate good y-o-y dynamics. In 1H05, sales grew 55.2% y-o-y and EBITDA soared by 59%, dispelling the rumors that the Russian mobile market was set for early retirement. As we expected, in 2Q05 Vimpelcom showed the best ever EBITDA margin of 51.8% and best ever net margin of 20.6% (the company net income climbed 45% to USD 158.8 million in 2Q05). Vimpelcom has also managed to improve its debt profile: the debt to equity ratio decreased from 0.76 at the end of 2004 to 0.67 at the end of 2Q05, despite the intensive investment activity. The company also reported that it may invest less than the initially reported USD 1.4 billion in 2005. We see this fact as positive for prices of both shares and bonds of the mobile operator. As we have previously reported, we expected good results from Vimpelcom. We expect high results for MTS, but Vimpelcom ,s record of q-o-q improvement is unlikely to be surpassed. Money market Rouble liquidity became scarce by Thursday evening, which could negatively affect domestic bonds and stocks today. However, one timely intervention on the interbank market by the state-owned giant Sberbank, which is sometimes unofficially charged with monetary policy tasks more suitable to the Central Bank, would help keep interest rates from rocketing. The euro stopped a hair below 1.23 USD/EUR, failing to take this psychological level in Asian trade. The rouble similarly broke the 28.50 RUB/USD resistance level to close at 28.4588. Given the lag between euro-dollar and dollar-rouble dynamics, we expect the dollar to continue sliding on the domestic FX market Friday. The trend is also supported by the end-of-the-month tax factor, as all taxes are paid in roubles. Bond market The rouble bond market was strong on Thursday despite tax payments, but narrow spreads are still a concern for investors. However, at the end of the day, the worsened situation in the money market put some pressure on bonds. On Friday, we expect the bond market to follow the trend in the money market: if liquidity gets poorer, a sale could take place in all tiers of the market. The corruption scandal in Brazil forced investors to price this risk into all bonds of emerging markets, and Russia was no exception Thursday. The EMBI+ Russia spread added 2 bps to 136 bps. At the same time, the yield of the benchmark UST ,10 continues to decline steadily, descending 2 bps to 4.16%, driven by rather weak data in the United States macroeconomic situation. The indicative Russia ,30 yield thus lost 3 bps and stood at 5.55%. Overall, the news on the American economy remains mixed, and we expect the market to take a break before more clear and significant news emerges. Equity market Little activity is expected on the equity market Friday with locals heading out earlier to their dachas and foreign participants no doubt keeping a low profile ahead of the long weekend in the UK. The best news came from Western markets Thursday where it was a good day for telecoms: MTS added 3.8%, Rostelecom grew 0.7% and Golden rose 1%. Following the announcement of its financial results (see story above) Vimpelcom displayed a vigorous performance of 3.24%. In Russia a slight correction in Brent oil prices (down by 1.1% to USD 66.38/bbl.) did not alter the cheerful oils\' march forward: Sibneft gained 1.4%, Surgut ) some 1.2% and Novatek settled 0.5% higher. As a result, RTS rose by another 0.2% to 864.95 on medium trade volumes. RAO UES shares, a favourite of the market the day before, failed to hold their ground dropping 0.5%.
August 26, 2005
Banco Bilbao (BBVA) Brasilian Market Comments and Yield Curve Update
Description
Despite market exhibiting a remarkable strength, there is nothing much to cheer about. Political issues are not resolved and more dirt may be unveiled. One thing is for sure: today we may see more volatility on the back of Michigan Confidence numbers at 9:45am and Greenspan\'s Speech at 10:00am..... Yield curve dynamics remains the same as it was yesterday. Belly of the curve is still lagging: Bra 12,11,and 10s (9.25%) have done well on the curve, while Bra 14.5% 09 have been cheapening significantly. On the EUR curve, Bra 12EUR has cheapened to Bra 15EUR. Bra 07EUR have been trading rich to the curve and it is a good time to reduce long position in that bond. 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 MDM Fixed Income Daily
Description
We are currenlty marketing a new CLN issue for JSC Seventh Continent - the leading Moscow food supermarket network operator. Indicative terms: Borrower JSC Seventh Continent Lead Manager MDM Bank Type Credit Linked Notes Issuer Dresdner Bank AG (London) Amount US$ 90 mm Maturity 2 years, [Put/Call - TBD] YTM [7.25%-7.75%]
VTB Capital MNB\'s Russian Economic Overview
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Russia\'30 at new high again
- Yakutia-5 target moved down to 7.75%
- Interbrew hits our target 7%
- FSK UES upgraded Buy, YTM target 7.1%...
Description
FX and money market Yesterday, payments of the mineral resources tax and excise duties caused a squeeze on rouble liquidity spiking overnight interest rates to 8% on average while NOSTRO balances dropped to RBL234.4bn (-38.2bn). On August 29 Russian companies will be paying profit tax (some RBL150 bn), the last tax payment this month. As a result, money market conditions will be tense by the end of tax-payment period. In the FX market the rouble fluctuated in the range of RBL/US$28.45-28.47 feeling upward pressure because of the above-mentioned rouble’s shortage and euro’s appreciation closing to US$/EUR1.23. Today we expect to see the rouble at around RBL/US$28.44-28.50. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Thursday demonstrated mild trading liquidity and, again, mixed price action: government and municipal sectors were enjoying greater demand, while corporate bonds on average remained unchanged. Short-term rouble rates grew significantly yesterday due to the mineral resource tax payments. Now, 1-day MIBOR is at 4.5%, which is significantly higher, than its ‘normal’ level, located at around 2%. Only one more tax payment remains in August – the profit tax on August 29, after which the financial system should not see significant liquidity drains until mid-September. Meanwhile, US Treasuries continued growing yesterday, reaching by now level 4.15% in US10Y against 4.18% one day earlier. This modest success enabled Russia’30 to demonstrate a new historical high, as currently the Russian benchmark is trading at 112.50/75, while the previous high was located at 112.4375. We maintain a short-term positive outlook for both Treasuries and Russian Eurobonds, at least while US10Y is trading above 4%. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +8bp, MosReg-5 +4bp, Moscow-40 +5bp. Also, Yakutia (B+ from Fitch) bonds were very popular among buyers yesterday: Yakutia-6 grew 130bp reducing its yield to maturity in 5 years to 8.06%. Yakutia-5, regarding which we maintain a Buy recommendation, demonstrated much more limited gains of +16bp, now yielding 7.95% to maturity in 20 months. The large movement of Yakutia-6 allows us to move the target for Yakutia-5 further down, as the latter is now trading 218bp above the OFZ curve, while the spread of the former is only 122bp. Taking this into account, we maintain a Buy recommendation for Yakutia-5 and relocate its YTM target from 7.9 to 7.75%. Similarly, IrkutskReg (B from S&P, 8.01% for 2 years) is offering a premium of at least 15bp to its fair value, thus promising a price upside of 20-30bp. And, last but not the least, we would like to repeat that Moscow-39 appears to be the most attractive investment in the sector now. The bond is now yielding 7.77% to maturity in 9 years, while our target for it is located at 7.6%. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-3 +0bp, Gazprom-4 -8bp, Lukoil -2bp, RZhD-3 +8bp. Second-tier bonds: Baltika +4bp, Megafon-3 -15bp, Pyaterochka -34bp, Rosbank -5bp, UrSi-4 -4bp, CenTel-4 +29bp, ChTPZ +5bp. FSK UES (B+ from S&P) bond is becoming increasingly interesting. The paper is now trading at 7.32% to maturity in 28 months, which constitutes a spread of 117bp over the OFZ curve. At its lowest level seen in June 2005 the spread was close to 90bp, which promises a yield reduction potential that we are currently estimating at about 20bp, which, in turn, provides a price upside of 40bp. Therefore, we recommend buying FSK UES now with a YTM target 7.15%. Interbrew bonds grew 40bp over the last week and are now trading at 6.85% to maturity in 1 year. As our target for the issue was located at 7%, we believe that now it exhausted its speculative upside and appears to be fairly valued. Taking this into account, we recommend leaving the bond on position only if the paper is needed as a passive investment vehicle with its current YTM being the expected HPR to be received over the next year. We also maintain a Buy recommendation regarding RusAl-2, which is now trading close to 7.7% to maturity in 21 years. We believe the bond is attractive above level 7.5%. We also expect Gazprom-3 bonds to reach 6.25% in the immediate future, compared to current level 6.46%. The issue is trading 50bp above the Moscow curve, while longer bonds Gazprom-5 and Gapzrom-4 are paying no premium to corresponding Moscow issues. Short term market view The beginning of the next week should again see a jump in money market rates on the payment of the profit tax, and after that there will be nothing impeding price growth, as another major market driver – Russian Eurobonds – are now stronger than ever. Therefore, we are currently maintaining a Hold recommendation regarding long rouble bonds, but are likely to review it on Monday. Dmitry Dudkin, Moscow (7 095) 755 5480 Reserves dropped International reserves dropped by US$0.8bn Yesterday, the CBR released its latest reserve performance figures, showing that reserves dropped by US$0.8bn to US$148.1bn on 19 August 2005. Despite the CBR buying dollars, the reserve dynamics were affected by foreign debt payments exceeded US$2bn. The CBR continues to intervene in the FX market, buying US$2-3bn excess dollars per week, and as a result, international reserve accumulation will continue in the coming weeks. We maintain our forecast for international reserves at US$170bn by 2005-end. Investment implications: Reserves remain very sizeable, which will help to protect the economy from any external shocks. Their volume has already surpassed that of Russia’s foreign sovereign debt and is likely to continue to grow this year on the back of high oil prices. We forecast reserves to grow further and reach US$170bn by 2005-end 2006 budget draft PM Mihail Fradkov signed the 2006 budget draft which was officially submitted to the Duma Yesterday, the 2006 budget draft was signed by the PM and officially submitted to the Duma. As the draft has been already discussed and amended by the Duma factions and Committees during the so-called “zero” (unofficial) reading in the Duma, we believe its approval will go quickly and smoothly. The budget draft was called “the budget of development” and states significant increase in social expenditures and government financing of investment projects. Nevertheless, high oil prices will keep the budget revenues solid, boosting budget surplus to 3% of GDP. Investment implications: As widely expected, Russia is very unlikely to face any fiscal problems in 2005 and beyond while oil prices remain high. Despite the budget process’ importance for the country, the prospering situation with government finances reduces the market’s interest to the issue. Julia Tsepliaeva, Moscow (7 095) 755 5489
August 25, 2005
Raiffeisen Bank Daily Market Monitor
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- Large tax payments due today (-)
- Euro breaks 1.2255 resistance (+)
- Rosbank downgraded to Hold on hitting 8%
- Gazprom-3 still attractive...
Description
FX and money market Money market conditions remain in a good shape in spite of the tax payment period, there was no problem with rouble liquidity yesterday – overnight interest rates performed around 1-2% while NOSTRO balances stood at RBL272.8bn. The market is inundated with roubles due to the spill of huge export proceeds on the back of high oil prices. Today, mineral resources tax and excise taxes should be paid worth a total amount of RBL80bn, however we do not expect an outstanding spike in interest rates. In the FX market, for the most part of Wednesday the rouble traded in the range of RBL/US$28.57-28.59 because of the euro’s weakness against the dollar. But by the end of trade, July’s unexpectedly disappointing US durable goods order releases gradually pushed the euro up, which accordingly brought the rouble up to RBL/US$28.48. Today we expect to see the rouble at around RBL/US$28.44-28.49. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market On Wednesday trading activity was again very significant in all three market sectors, exceeding that for Tuesday in corporate and municipal bonds. Price dynamics were limited and somewhat mixed: government papers were growing, high-grade corporate bonds and munis on average corrected downwards slightly, second-tier corporate issues were, on the contrary, edging higher. Russia’30 was again trying to beat its previous achievements, but failed to do so yesterday. The benchmark is now close to its prior level, trading at around 112.375 with an increased bid-ask spread. This inability to move further was dictated by US Treasuries, where US10Y attempted to lower its yield further on weak US durable goods data, reached level 4.15% (vs. 4.18% in the morning), but later, on the very strong new home sales release erased the gains trading now again at 4.18%. Nevertheless, our short-term view for US Treasuries and, correspondingly, Russia’30 remains positive, at least until US10Y reaches level 4%. Meanwhile, yesterday the euro/US$ exchange rate broke intermediate resistance 1.2255 upwards and now appears to be aiming for higher levels, having 1.25 in mind as the first reference. This creates an upside for the rouble/US$ rate of 20-25 kopecks and should support the local bond market in a short-term perspective. Government sector Buying activity was again evident in long OFZs yesterday, for the first time in a week: OFZ 46014 +12bp, OFZ 46017 +20bp, OFZ 46018 +32bp. As indicated, OFZ 46017 grew 20bp yesterday reaching yield level of 7.57% to maturity in 11 years. Our current recommendation for that bond is a Hold with a target of 7.5% that is expected to be hit shortly. Currently, we have no Buy recommendations in the sector. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +14bp, MosReg-5 -3bp, Moscow-27 -7bp. In spite of recent growth (the bond gained 115bp since the beginning of August), Moscow-39 remains the most obvious purchase in the sector now, as its spread to the OFZ curve still exceeds 40bp – very close to the historical maximum of 48bp. Our target for the YTM of the bond is located at 7.6%. As for the non-Moscow bonds, Yakutia-5 (B+ from Fitch, 8.06% to maturity in 20 months) is looking at least 15bp above its fair YTM level. In addition, the bond possesses higher liquidity than many other municipal bonds due to significant issue size (RBL2bn). Similarly, IrkutskReg (B from S&P, 8.06% for 2 years) is offering a premium of at least 15bp to its fair value, thus promising a price upside of 20-30bp. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-3 +0bp, Gazprom-4 -12bp, Lukoil -4bp, RZhD-3 -10bp. Second-tier bonds: Baltika +35bp, Pyaterochka +29bp, Rosbank +42bp, UrSi-4 +10bp, CenTel-4 -4bp, ChTPZ +13bp. Rosbank (Ba3/B-) grew 42bp yesterday reducing its YTP to 7.99% and thus reaching our target level of 8%. Therefore, we are changing our recommendation for the bond from Buy to Hold – in line with our general recommendation for long rouble bonds. Rosbank still appears undervalued relative to the market, but its upside has become less certain. We relocate our target for the issue to 7.75%. We currently maintain a Buy recommendation regarding RusAl-2, which is now trading close to 7.7% to maturity in 21 years. We believe the bond is attractive above level 7.5%. We also expect Gazprom-3 bonds to reach 6.25% in the immediate future, compared to current level 6.46%. The issue is trading 50bp above the Moscow curve, while longer bonds Gazprom-5 and Gapzrom-4 are paying no premium to corresponding Moscow issues. Short term market view Today we are likely to see a local peak of short-term interest rates due to the payment of the mineral resource tax and excise duties. Also, on August 29 Russian companies will be paying their profit tax. After that the tax payment schedule is clean until mid-September. With this in mind, we are currently maintaining a Hold recommendation regarding long rouble bonds, but are likely to review it at the beginning of next week. Dmitry Dudkin, Moscow (7 095) 755 5480
August 24, 2005
VTB Capital MNB Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- We recommend Yakutia-5, IrkutskReg, Moscow-39 among munis
- Target for Rosbank: 8%
- Gazprom-3 downgraded to Hold on good performance...
Description
FX and money market On Tuesday, the Russian FX market trading activity was calm on moderate volumes. The rouble felt some upward pressure on the back of euro’s appreciation against the dollar, and as a result, it performed around RBL/US$28.53-28.55. However, this trend was short-lived and by the end of the day the euro rebounded again showing its weakness which pushed the rouble to RBL/US$28.57. Today we expect the rouble will continue to following the euro and to see it in the range of RBL/US$28.57-28.62. On the other hand, the spill of oil proceeds in the market will probably limit rouble’s drop. Olga Golub, Moscow (7 095) 755 5176 Rouble bond market Tuesday was a more active day than the slow Monday with exchange turnover rising in all market sectors. Price action was neutral in government papers and marginally positive in both municipal and corporate sectors, especially in the second-tier corporate bonds. The local debt market was supported by strong Russian Eurobonds, but this effect was countered by the falling rouble. Russia’30 traded yesterday as high as 112.4375 thus establishing a new historical top. This became possible as US10Y finally broke the 4.2% level and descended in yield to current 4.18%. This movement supports our short-term positive view for US Treasuries: we believe that level 4% is likely to be reached by US10Y already in the beginning of September, which will take Russia’30 to 114. Below this point, US10Y will meet the upward sloping trendline support (on the yield chart), which in the first half of September will be located slightly above 3.9%. Then the future direction of US10Y will depend on whether the benchmark succeeds in breaking this support as well, or will be pushed up from it following the possibly strong American unemployment data release on September 2 or the next FOMC decision on September 20. Municipal bonds Price changes for most liquidly traded bonds in the secondary market: Moscow-39 +11bp, MosReg-5 +4bp, KrasnoyarskReg-4 +6bp, NovosibReg-2 +2, Yakutia-5 +5bp. As we are currently mostly looking at conservative, relatively short-term issues, we would like to recommend buying the flowing non-Moscow bonds. Yakutia-5 (B+ from Fitch, 8.03% to maturity in 20 months) is looking at least 15bp above its fair YTM level. In addition, the bond possesses higher liquidity than many other municipal bonds due to significant issue size (RBL2bn). Similar to this, IrkutskReg (B from S&P, 8.05% for 2 years) is offering a premium of at least 15bp to its fair value, thus offering a price upside of 20-30bp. We also continue to recommend buying bonds on the long end of the Moscow curve (Baa3/BBB-). Specifically, we believe that Moscow-39 is now strategically the most attractive investment in the sector. Currently, the paper is trading at 7.81% to maturity in 9 years, while our target for it is located at 7.6%. Corporate sector Price changes of corporate benchmarks in secondary trading: Gazprom-3 +18bp, Gazprom-4 -11bp, Lukoil +14bp, RZhD-3 +3bp, FSK UES +3 bp. Second-tier bonds: Megafon-3 -10bp, UrSi-4 +10bp, CenTel-4 +23bp, ChTPZ +22bp. We continue to recommend Rosbank (Ba3/B-) issue as one of the most undervalued in the mid-term segment of the corporate sector. Currently, the bond is yielding 8.4% to put in 18 months, while its fair level is located below 8%. As indicated above, Gazprom-3 yesterday grew 18bp, reducing its yield from 6.6 to 6.46% to maturity in 17 months. Due to this movement, we are downgrading the bond from But to Hold, as we believe it still possesses enough investment value to leave it on position. In the short-term perspective the bond can reach level 6.25%. Meanwhile, another bond that we recommended for buying yesterday, RusAl-2 gained only 5bp and reached yield level 7.69% to maturity in 21 months. We maintain our Buy recommendation regarding this issue, as we believe it can easily reach level 7.5% in the nearest future. Short term market view Our general recommendation regarding long rouble bonds is now a Hold, having been recently upgraded from a Sell. Now the market appears to be in preparation for another growth round we should see in the first half of September, but we believe it is too early to start accumulating long bonds now, as selling is still possible on large tax payments due tomorrow and on August 29. Dmitry Dudkin, Moscow (7 095) 755 5480 City of Moscow: 2006 budget 2006 budget draft was approved by the government Yesterday, City of Moscow’s government approved 2006 budget draft. Budget revenues have been set at RBL460.7bn (US$16.2bn), budget expenditures were increased to RBL474.9bn (US$16.7bn). As a result the budget deficit is planned to remain modest at RBL14.2bn (US$0.5bn, or 3% of revenues). Despite this we believe City of Moscow is likely to enjoy additional budget revenues in 2006, the government’s expenditure appetite is also likely to increase. Taking into account, that City of Moscow will redeem at least RBL16bn we believe that it will continue aggressive borrowing in the domestic debt market (Please note that according to the law, Russian regions can issue new Eurobonds, or borrow abroad, only to finance foreign debt redemption). With a healthy combination of high credit quality and solid liquidity of bonds, investor’s demands for new City of Moscow bonds is more than likely to allow the Moscow government to place RBL30-40bn in 2006. Investment implications: The City of Moscow budget for 2006 looks realistic. Taking into account the budget deficit target and redemptions scheduled for 2006, we expect City of Moscow to place RBL30-40bn of new rouble bonds in 2006. Spreads over the sovereign curve are likely to drop to zero again in 2006 (currently, the average spread over the sovereign curve is 40-50bp, which is caused by soaring OFZs with parallel improvements in their liquidity, and no new issuances of City of Moscow). Julia Tsepliaeva, Moscow (7 095) 755 5489
August 23, 2005
B&N Bank MDM Fixed Income Daily
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