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Source Research
July 27, 2005
VTB Capital MNB Daily Market Comment
July 26, 2005
Alfa Bank Alfa Bank`s Weekly Report
Description
THE WEEK\'S NEWS Industrial production in Russia in 1H05 grows at rate of 4% ь Exchange and money markets Following a downward correction of 10 kopecks (to R28.68/$), the ruble rate will be located in a range of R28.65-28.70/$ in the absence of significant macroeconomic news. US GDP data for 2Q05 will be released on Friday and will define the market?s further dynamic. Rates on ruble resources will stay at a high level due to ongoing tax payments and closing of accounts. Demand for rubles may provoke a marginal rise in the ruble rate while long positions on the dollar are closed. ь Eurobond market Prices will likely maintain their declining trajectory this week against a backdrop of low activity both on the US debt market and in the Russian Eurobond sector. In the corporate segment, active placement of new issues continues.
VTB Capital MNB Economic Overview
B&N Bank MDM Fixed Income Daily
VTB Capital MNB Daily Market Comment
July 25, 2005
Alfa Bank Alfa Bank\'s Weekly Report
B&N Bank MDM Fixed Income Daily
ING Wholesale Banking Russia Russian Fixed Income Daily
- Recommendation for long rouble bonds changes from Hold to Buy
- Focus should be left on second-tier issues
Description
FX and money market Last week the rouble remained very volatile, following the euro\'s trend. Allan Greenspan\'s speech and the revaluation of the Chinese yuan appeared to be the two main events pushing the euro up last week, although it dropped back to US$1.205/Eur at the end of last week. Consequently, the rouble appreciated to RBL/US$28.5847 (tom) on Friday. This week, the rouble is expected to remain very sensitive to EUR/USD performance. Currently, the CBR has de-facto strengthened correlation between the rouble and the euro to some 95%, resulting in higher uncertainty about the rouble in the short term as the euro is likely to remain very volatile against the dollar. The rouble\'s liquidity is likely to remain supportive for it. Currently, interbank rates remain high at 6-6.5%, although we expect them to fall to 2-3% in the middle of this week. At the end of this week, however, rouble liquidity is likely to sour again due to the end-of-month seasonal effect. Nevertheless, the impressive supply of oil dollars in the market and increasingly strong inflationary pressure is likely to result in an about-turn in CBR policy, most probably in September. To reduce inflation, the CBR needs to allow the rouble to become less dependent on the euro and let it appreciate against the dollar. We expect to see the rouble around 27.4-27.6/USD by 2005-end Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Friday was quite a calm day on the domestic bond market with trading activity at the same, slightly below average level, as the day before, and the already notorious flat price movement. In short, price changes were a little negative on the government and municipal sectors and a little positive for corporate bonds. The money market improved somewhat on Friday with 1-day MIBOR falling below 5%, although short-term rates are still significantly higher than their \'normal\' levels seen at times of no rouble liquidity deficit. The local FOREX market is helping banks to accumulate roubles as large exporters have been recently selling their dollar revenues, but a large part of these roubles will be paid today to the government as it is the due date for the mineral resource tax. At the same time, US Treasuries grew on Friday in an upward correction that, however, did not erase all the losses incurred in Thursday\'s large fall. US10Y dropped in yield from 4.27 to 4.22%, but overall American bonds still appear to be in an intermediate-term downward trend. Government bonds OFZ 25057, whose large additional placement on July 20 drew significant market attention, gained on Friday an additional 5bp and is yielding now 7.41% to maturity. The price gain for those who received the paper at the auction is close to 40bp, so we again recommend fixing profits in this bond by, at least partly, selling the size received at the auction. We say \'partly\' here, as the bond actually continues to look undervalued on the curve and retains a potential of yield reduction that can be estimated at a maximum 5-10bp. OFZ 46018 fell 25bp yesterday on a small turnover of RBL8mln. Right now its YTM is 8.69%, which makes the bond one of the most attractive in the sector as our first target level for the yield is located at 8.5%. Such price dips should be seen as buying opportunities, because the problematic (from a money market standpoint) July is ending and the beginning of August is expected to produce lower short-term rouble rates. Corporate bonds Price changes for corporate benchmarks in secondary trading: Gazprom-4 +15bp, Lukoil +6bp, RZhD-3 +17bp, FSK UES +12bp. Second-tier bonds: Pyaterochka +30bp, Salavat-2 +2bp, UrSI-5 +30bp, CenTel-4 +12bp. It is clear from the data that the positive sentiment towards high-grade bonds induced buying interest in second-tier issues that resulted in larger growth simply because the spreads of second-tiers bonds to the OFZ curve are much wider. Corporate bonds currently looking attractive from a relative value standpoint: Baltika (YTM target 8.5%), CenTel-4 (YTM target 10%), Pyaterochka (YTM target 9.75%), Megafon-3 (YTM target 8.5%), TMK-2 (YTP target 9%), Salavat-2, FSK UES, Lukoil. Tomorrow, PMZ (Perm Motor Plant) will be auctioning is debut bond issue of RBL1.2bn. The bonds will have 4 years to maturity with a 1-year put option, to which they initially will be traded. PMZ is unrated by major rating agencies, so the bonds will mostly meet only local demand. YTP to be expected in excess of 10.5%. Short term market view We believe that money market conditions will improve at the beginning of August. Monday is usually the weakest day of the week, so today is the best moment for us to change our trade recommendation regarding long rouble bonds from Hold to Buy. Given this, accumulation focus should be on second-tier bonds offering larger upside potential. Dmitry Dudkin, Moscow (7 095) 755 5480 Economic commentary Oil prices for 2006 budget The government has updated its oil price forecast to US$40/bbl (Urals) for 2006, which will result in further softening of fiscal policy Last week, the Economy Ministry submitted a new version of its macroeconomic forecasts for the 2006 budget. The oil price forecast was upgraded by US$5/bbl to US$40/bbl (Urals). This means that the 2006 budget revenue target will be increased by some RBL300bn (US$10.5bn), creating fresh temptation for an increase in budget expenditures. According to the head of the expert department of the president administration, Arkady Dvorkovich, the government wants to channel RBL200bn of these RBL300bn to new investment programmes and RBL100bn for social expenditures. Although the new oil forecast does not look excessively optimistic, further softening of fiscal policy is not good for Russia, and an additional increase in non-interest expenditures in 2006 will not help to significantly reduce inflation. Currently, the government is discussing a downgrade of the 2006 inflationary target range from 7-8% to 8-9%, while we are even more pessimistic and forecast inflation at 10% by 2006-end. The idea to substantially increase government investment could be fruitful, in particular if the government chooses efficient infrastructure projects. However, the government may face a problem with the selection of projects (past experience has been strictly negative), which would reduce positive gains from the projects and also accelerate inflation. Investment implications: The government has made its oil price forecast for the 2006 budget more realistic, although this will result in a further softening of fiscal policy. Despite Russia being able to afford additional spending, we doubt their likely effectiveness (investment projects) and forecast inflationary consequences of a softer fiscal policy. Inflation is very unlikely to fall below 10% in 2006. Julia Tsepliaeva, (7 095) 755 5489
VTB Capital MNB Daily Market Comment
July 22, 2005
VTB Capital Daily Market Comment
ING Wholesale Banking Russia Russian Fixed Income Daily
- OFZ 25057 returned to pre-auction level: fix profits
- MosReg-5 reached our target 8.25%: Hold
- Monday is the day to start accumulating long bonds
Description
FX and money market Yesterday, the euro/dollar exchange rate was affected significantly by the revaluation of the yuan, with the euro experiencing both volatility and upward pressure. Consequently, inter-day rouble volatility also increased and the rouble gained some 7 kopecks rising to RBL/US$28.5902 (tom). The stronger yuan also made the market more pessimistic about the dollar. As a result, daily turnover at the FX market reached US$3.3bn (two-threefold higher than on average), which boosted rouble liquidity in the money market. Currently, interbank rates have dropped below 3% despite high tax payments. Today, the rouble exchange rate will remain highly correlated with the euro and we expect it in the range RBL/US$28.55-28.60. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market On Thursday trading activity was down compared to Wednesday, with the exception of the government sector, where aggregate exchange turnover was formally very high. We probably don\'t have to mention that prices on average did not change as this amazing stability has been continuing already for a month. Money market conditions have been quite hard: in spite of some growth of balances in correspondent accounts, short-term rouble rates rose yesterday, reaching 6.24% (1-day MIBOR) this morning. In addition, US Treasuries fell significantly yesterday following the news about the liberalization of the currency regime in China. As a result of strong selling, US10Y jumped in yield to 4.28% threatening to reach the 4.5% level in August. Russia\'30 is now at 5.78% compared to 5.74% on Wednesday and its spread to US10Y has narrowed again to 146bp, almost reaching its recent historical minimum of 145bp. Government bonds OFZ 25057, whose large additional placement on July 20 drew significant market attention, grew yesterday 25bp reaching its pre-auction level of 7.42%. The profit for those who followed our recommendation and placed orders for the bond at 7.49% and higher is already 30-40bp, which justifies cashing it in. It is quite possible that OFZ 25057 will continue to fall in yield in the nearest future, perhaps reaching 7.35%, but it would be wise to sell a part of the size received at placement now. In secondary trading, OFZ 27019 and 46003 demonstrated phenomenal turnovers of RBL8.5bn and RBL3.7bn accordingly. Unfortunately, this does not reflect real market activity as if we look at the deal registry for the day, we see several buy-sell pair trades with identical volumes and a difference in price exactly equaling the MICEX commission. Therefore, it is almost certain that a large market participant simply wanted for some reason (probably accounting) to show portfolio turnover by selling and immediately buying back some of its OFZ holdings on exchange. Municipal sector Trading activity was not high here from a standpoint of the average trading volume, although market liquidity was substantial as traders\' activity was very evenly spread between large issues and higher-yielding bonds. Price changes for most liquid papers: Moscow-29 +3bp, Moscow-36 +6bp, MosReg-5 +12bp. MosReg-5 rose 12bp yesterday, almost reaching our target level of 8.25%. Right now the bond is yielding 8.26% to maturity in 5 years and we are changing our recommendation from Buy to Hold. We believe that within a month MosReg-5 could reach 8%, although with less certainty than our previous target. Moscow-39 (the longest on the Moscow curve, 9 years to maturity) recommenced trading today after being closed for coupon payment. We regard this paper as very attractive, as the anticipated shift of the long end of the OFZ curve below 8.5% is likely to bring Moscow-39 down 10-15bp in yield. Corporate bonds Price changes for corporate benchmarks in secondary trading: Gazprom-4 +0bp, Lukoil -11bp, RZhD-3 +8bp, FSK UES +5bp. Second-tier bonds: Megafon-3 +11bp, UrSI-5 +5bp, CenTel-4 +4bp. As we can see, not much was happening on the market yesterday - lots of bonds in the sector showed no exchange turnover and price movement was very limited. Corporate bonds currently looking attractive from a relative value standpoint: Baltika (YTM target 8.5%), CenTel-4 (YTM target 10%), Pyaterochka (YTM target 9.75%), Megafon-3 (YTM target 8.5%), TMK-2 (YTP target 9%), Salavat-2, FSK UES, Lukoil. Short term market view Money market conditions remain adverse and recently we have been seeing additional pressure on prices from American bonds. However, these external drivers are almost exactly compensated for by the domestic paper deficit pushing prices up in secondary trading. On Monday, Russian oil and gas companies will be paying the natural resource tax, which is likely to drive overnight rates even higher. On the other hand, in the beginning of August we should see significant improvement of rouble liquidity as banks accumulate roubles in the absence of large liquidity drains. Our current general recommendation regarding long bonds is a Hold, but we will review this on Monday as possible price falls will make the market look more attractive for buying. Dmitry Dudkin, Moscow (7 095) 755 5480 Economic commentary Macroeconomic performance: in line with expectations In 1H05, macroeconomic indicators remained solid, with some further improvements in June Yesterday, the FSSS released its macroeconomic figures for 1H05, which were solid as expected. Despite a general economic slowdown in 1H05 relative to the same period in 2004, June\'s figures showed some improvement. Investment demand recovered in June after May\'s poor result, which showed only 6.8% (YoY) growth. Fixed capital investment growth accelerated to 11% (YoY) in June, resulting in impressively high growth of 9.4% (1H05/1H04). Real disposable income expanded by an impressive 10.6% (YoY) in June and real wage growth was also sufficiently high, which is positive for consumption. The current positive trends in trade and investments allow us to maintain our forecast of economic growth at 6.0-6.3% in 2005. Retail trade turnover rose 11.3% in 1H05 showing that domestic demand remains one of the main factors stimulating economic growth. Unemployment dropped further to 7.5% of the economically active population - which is not bad - although this can be attributed to the summertime seasonal increase in employment. PPI dropped significantly to 0.1% (MoM), which represents a slowdown in annual PPI to 18.9% (YoY) from 21.7% (YoY) in May. This had been expected as a consequence of February\'s increase in natural monopoly tariffs and was fully priced-in in March-May 2005. Although high international commodity prices are pushing domestic wholesale prices up, we do not expect the latter to spike in 2H05. In June, we saw a drop in gasoline prices (a very encouraging signal for a potential slowdown in wholesale prices in general), which allow us to maintain our PPI forecast at 18.1%. YoY, % June 2005 1H05/1H04 2005F Industrial output 6.9 4.0 5.5 Fixed Capital Investment 11.0 9.4 8.5 Retail turnover 12.5 11.3 10.0 Real Disposable Income 10.6 8.3 8.0 Real wages 7.5 8.0 9.5 PPI (year-ave) 18.9 19.0 18.1 CPI (year-end) 13.3 13.0 11.5 _ Sources: FSSS, ING estimate Investment implications: Russia continues to deliver strong figures despite the clear slowdown relative to 2004, with fixed capital investment growth significantly accelerating in June. Retail turnover performance and real disposable income growth also look encouraging, while domestic demand is becoming increasingly important for economic growth in Russia. We remain optimistic regarding economic performance in 2005, which could be significantly accelerated if political risk is reduced Reserves dropped as expected International reserves dropped by US$9.7bn in the first half of July on the back of a Paris Club debt prepayment Yesterday, the CBR released its latest reserve performance figures, which as expected, showed that reserves fell by US$9.7bn to US$142.1bn in the period of 1-15 July 2005. This decline can be attributed to the Paris Club debt pre-payments of US$15bn that were made last week. The CBR continues to intervene in the FX market, buying US$2-3bn excess dollar liquidity 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.
Ansher Capital Monthly Report - June 2005
July 21, 2005
B&N Bank MDM Fixed Income Daily
ING Wholesale Banking Russia Russian Fixed Income Daily
- New liquidity sqeeze: CBR cancels REPO auction
- MosReg-5 is approaching our target 8.25%
- CenTel-3 at new highs
Description
FX and money market Yesterday, the rouble gained some 5.5 kopecks appreciating to RBL/US$28.6674 (tom) following appreciation of the euro. As the CBR is keeping the rouble exchange rate strongly correlated to the euro, today we expect the rouble to appreciate further and forecast it in the range of RBL/US$28.59-28.64. As expected, interbank rates in the money market increased to 6-6.5%. We do not expect any significant improvements in liquidity in the next few days due to further scheduled tax payments and the end-of-month effect. The relatively expensive rouble in the money market is supportive for the currency in the FX market. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Wednesday\'s trading activity was average in all three market sectors. Continuing the recent trend, prices did not change much, although municipal bonds grew marginally while government and corporate papers strictly moved sideways. The money market is experiencing a new liquidity squeeze for 3 primary reasons. Firstly, almost RBL16bn of OFZ 25057 was placed yesterday; secondly, Russian companies have been paying their VAT; thirdly, the CBR cancelled a REPO auction saying that the rates offered by banks were not acceptable. As a result, 1-day MIBOR is now at 5.37% and balances in correspondent accounts have fallen RBL46bn to a quite low RBL217bn. On the other hand, Alan Greenspan\'s speech on the economy resulted in a strengthening of US Treasuries in spite of the fact that initially, when the speech thesis was published, traders attempted to lift yields with US10Y reaching 4.24%. Right now US10Y is trading at 4.16%, which should today support Russian Eurobonds. Government bonds Yesterday, the CBR successfully placed RBL16bn of OFZ 25057 with a weighted average yield of 7.49%, which is exactly what we forecast. Cut-off yield was 7.52%, not far from average. YTM of 7.49% corresponds to a price of 100.44, but OFZ 25057 was already trading at 100.53 yesterday shortly after the auction. We believe the OFZ 25057\'s YTM will return to its normal level of 7.3-7.35% within a week, and in this range it would be wise to fix profits, which should be around 30-40bp. The next OFZ primary placement is scheduled for August 3, when RBL8bn of OFZ 25058 will be offered to the public. Municipal sector Wednesday saw quite significant turnover in Moscow bonds, while trading activity in higher-yielding papers was minimal. Price changes for liquid bonds: Moscow-29 +10bp, Moscow-36 +6bp, MosReg-5 +5bp. MosReg-5 is gradually approaching our target level. Currently, the bond is yielding 8.31% to maturity in 5 years, while we assess its fair YTM to be 8.25% and possibly even lower. Since it was last put on our buy list in mid-June, MosReg-5 has already gained 70bp in price. Corporate bonds Price changes for corporate benchmarks in secondary trading: Gazprom-5 +5bp, Lukoil +7bp, RZhD-3 +15bp, FSK UES -8bp. Second-tier bonds: Megafon-3 -10bp, Pyaterochka +15bp, Salavat-2 -10bp, TMK-2 +0bp, CenTel-4 +16bp. CenTel-4 is again at its all-time high, having traded yesterday at 112.55, corresponding to a YTM of 10.23% - closer than ever to our target level of 10%. In spite of this growth, we are leaving CenTel-4 on our buy list as the bond continues to offer a price upside of 70bp, which is very significant in comparison to other available trading opportunities. Whether it is the result of our research or not, shortly after yesterday\'s release of our update Baltika bonds suddenly enjoyed traders\' attention and rose 24bp. Baltika is now yielding 8.71% to maturity in 2.5 years and we believe the bond has further upside potential as our first target for it is 8.5%. Other corporate bonds currently looking attractive from a relative value standpoint: Pyaterochka (YTM target 9.75%), Megafon-3 (YTM target 8.5%), TMK-2 (YTP target 9%), Salavat-2, FSK UES, Lukoil. Short term market view Rouble bonds remain well supported by growing demand due to the market\'s small size in spite of currently adverse money market conditions. Large, liquid issues are scarce and summer is seeing few primary placements. Nevertheless, as more tax payments approach (natural resource tax on July 25 and profit tax on July 28) limited price falls remain possible. Our general recommendation remains a Hold in expectation of possible market weakening, but we are considering reviewing our position around July 25. Dmitry Dudkin, Moscow (7 095) 755 5480 For full info please visit our Web site www.ing.ru
VTB Capital MNB Daily Market Comment
July 20, 2005
Raiffeisen Bank Russian Daily Monitor
VTB Capital Daily Market Comment
B&N Bank Fixed Income Daily
ING Wholesale Banking Russia Russian Fixed Income Daily
- Level to start bids for OFZ 25057 today - 7.49%
- Our target for Baltika\'07 is set at 8.5%
Description
FX and money market Yesterday, the rouble lost some 6 kopecks sliding to RBL/US$28.7345 (tom) following a drop in the euro. As the CBR is keeping the rouble exchange rate strongly correlated to the euro, today we expect the rouble to appreciate and forecast it in the range of RBL/US$28.65-28.7. As expected, in the money market interbank rates increased to 5-5.5% due to large tax payments to be made today. We do not expect any significant improvements in liquidity in the next few days due to further scheduled tax payments and the end-of-month effect. The relatively expensive rouble in the money market is supportive for the currency in the FX market. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market On Tuesday, trading activity returned to average after a very slow Monday. At the same time, it was the first time this month that prices in the corporate sector actually fell simultaneously in the majority of liquidly traded bonds. This fall was not large, but, as we said, took place on the back of rising turnover. On the other hand, nothing similar happened in the municipal sector, where prices of long bonds marginally rose. Meanwhile, money market conditions have been gradually deteriorating: 1-day MIBOR is currently at 3.7%, but this morning overnight interbank rates were at 6-7%. The primary reason for this is the many times mentioned tax payments (VAT) amounting to RBL130-140bn. This is not the end of the story: on July 25, Russian companies will pay the natural resource tax and the excise duties, and on July 28, the profit tax. At the same time, US Treasuries interrupted the constant fall that they have exhibited since the end of June. Yesterday, US10Y tested a yield level of 4.23% upwards, but failed to cross it and later retreated to 4.18%, which was significantly lower than the opening point (4.21%). This did not prevent Russian Eurobonds from falling, however, as traders allowed the sovereign spread to widen several bps and as a result Russia\'30 fell in value from 111 to 110.5. This in itself is not a big deal, but now the main benchmark is significantly off the recent tops located above 112. Russia\'30-US10Y\'s spread is now at 149bp. Government bonds The main event here today is the CBR\'s auction of an additional RBL16bn tranche of OFZ 25057. At the moment, the paper is yielding 7.42% to maturity in 5 years, so we believe it reasonable to start placing bets for it from 7.49% and upwards. 7.49% YTM on the auction date will correspond to a price of 100.41. The tactics are standard: buy the bond at the auction and cash profits in a day or two. Profit to be expected: about 30bp. Corporate bonds Price changes for corporate benchmarks in secondary trading: Gazprom-3 +4bp, Lukoil +7bp, RZhD-3 -11bp, FSK UES -12bp. Second-tier bonds: Pyaterochka -20bp, TMK-2 +15bp, CenTel-4 +0bp. As can be seen, price action was more negative in first-tier issues, while bonds with lower credit displayed no clear tendency. Baltika bonds have been undeservedly forgotten by investors and currently look significantly undervalued on a relative value basis. Right now, Baltika is yielding 8.93% to maturity trading in line with UrSI-4 while being significantly better in credit quality. In our opinion, Baltika\'s fair YTM level is below 8.5%, which promises a price upside of 70bp. Other corporate bonds currently looking attractive from a relative value standpoint: Pyaterochka (YTM target 9.75%), CenTel-4 (YTM target 10%), Megafon-3 (YTM target 8.5%), TMK-2 (YTP target 9%), Salavat-2, FSK UES, Lukoil. Short term market view The situation on the domestic bond market is worsening slightly, as we anticipated based on our rouble liquidity level forecasts. We expect adverse money market conditions to last throughout the rest of July, and also cannot exclude the possibility of a further fall in US Treasuries to 4.5% in US10Y. These factors are likely to continue to generate price falls in long rouble bonds that are advised to be used for purchases. Our general recommendation remains a Hold in expectation of further market weakening, but we are considering changing it to a Buy at around July 25. Dmitry Dudkin, Moscow (7 095) 755 5480 For full info please visit out Web site www.ing.ru
Ansher Capital Monthly Report - May 2005
July 19, 2005
B&N Bank We would recommend to start
taking speculative long positions in Russian Eurobonds, counting on later
UST yield decreases and, accordingly, higher Russian Eurobond prices.
Raiffeisen Bank Daily Market Monitor
ING Wholesale Banking Russia Russian Fixed Income Daily
- Yields of long OFZs are too high
- Second-tier corps will continue growing
- Overall, we have modestly negative view till the end of July
Description
FX and money market Yesterday, the rouble lost some 3 kopecks sliding to RBL/US$28.676 (tom) following a drop in the euro. As today the euro has continued to fall, we expect the rouble to weaken further and forecast the exchange rate at RBL/US$28.7-28.75. At the end of the day, there will be a rouble liquidity squeeze following large scheduled tax payments estimated at RBL130-140bn. Currently, tom next interbank rate has already spiked to 5-6% and we expect them at 7-8%. At the beginning of next week, natural resource tax payments of some RBL100bn could delay any improvement in liquidity and should be supportive for the rouble. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Trading activity was very low on Monday: aggregate turnover for domestic bonds were just RBL3bn - the lowest since May 17. Nevertheless, bid-ask spreads have been recently very stable and narrower than their average level for the last year, which indicates considerable confidence in the market prospects, while low activity simply appears to be a consequence of the summer slowdown. Price action was very modest yesterday, but it was clear that the entire market was well-supported: corporate and municipal bonds grew slightly on average, while OFZs remained unchanged. On the other hand, looking at external factors, the situation appears dangerous: US10Y has been gradually growing in yield and is now at 4.22% - its highest since the beginning of May. The spread compression of Russia\'30 to US10Y has prevented the former falling too much, but if US10Y approaches 4.5%, we will inevitably see a considerable decline in Russian Eurobonds. At the same time, the rouble deficit has been hitting the market every second half of every month since May. Rouble depreciation has been draining liquidity from the banking system causing short-term rates to jump on any significant tax payment. Right now 1-day MIBOR is at 3.3%, which is higher than normal, and we expect it to grow and possibly exceed 5% within the next 10 days. Government bonds Tomorrow the CBR will auction an additional RBL16bn tranche of OFZ 25057. At the moment, the paper is yielding 7.41% to maturity in 5 years, so we believe it is reasonable to start placing bets for it from 7.49% and upwards. 7.49% YTM on the auction date will correspond to a price of 100.41. The tactics are standard: buy the bond at the auction and cash profits in a day or two. We will publish updated pricing for the bond just before the auction on Wednesday morning. Apart from this, there are two trading ideas remaining in the sector. First, we believe the yields at the long end of the curve are too high. Specifically, OFZ 46018 currently yielding 8.65% to maturity in 16 years may fall in yield below level 8.5%, perhaps reaching 8.25%. Our first price target for the bond is located at 98 (8.48%) compared to the current 96.75 now. OFZ 25058 also looks significantly mispriced. Although the upside is more limited here, as OFZ 25058 has only 3 years to maturity, the bond offers correspondingly less exposure to interest rate risk, which may be attractive to cautious investors. At the moment, OFZ 25058 is yielding 7% to maturity, while we believe its fair level is located at 6.8% offering a price growth potential of 50bp. Municipal sector Price changes for liquidly traded papers: Moscow-40 +3bp, MosReg-5 +6bp, NovosibirskReg-2 -9bp. For the next couple of weeks, we have only two definite trading ideas for the municipal sector. First, since we are counting on yield reduction at the long end of the OFZ curve, Moscow-39 remains the most attractive asset on the Moscow curve. Currently the bond is locked for coupon payment due July 21, but after that, if the yield of OFZ 46018 goes under 8.5%, Moscow-39 will be able to move under the 8% level and reach 7.9% against most recent 8.08%, which constitutes a price upside of 100bp. Second, MosReg-5 remains a strategically attractive bond as it still yielding the same 8.35-37% as MosReg-4 (now closed for coupon till July 26) that has a longer duration. Our current target for MosReg-5 is 8.25%, but as the level is reached we will possibly move it further down to 8%. Corporate bonds LT credit rating of the Russian Standard Bank was raised yesterday by S&P one notch from B to B+. This is an important event for the bank, which will enable it borrow cheaper in the future, but from the market perspective the news is hardly exploitable. We believe the may be some reaction the action today, but bonds of the bank, such as RusStand-2/3/4 are all effectively much shorter than 1 year, so speculative gains will be very limited. Also, if RusStand-2 and RusStand-4 move a bit lower in yield, they will immediately become less attractive than their neighbours Mechel-TD and SG, so we believe it is better to buy these bonds if short instruments are needed. Price changes for corporate benchmarks in secondary trading: Gazprom-5 +35bp, Lukoil +4bp, RZhD-3 +2bp, FSK UES +19bp. Second-tier bonds: Pyaterochka -8bp, TMK-2 +16bp, CenTel-4 +39bp. Again, traders\' attention was focused on second-tier bonds that still have some spread narrowing potential compared to high-grade securities pressed against Moscow and OFZ yield curves. Yesterday Pyaterochka for the first time encountered moderate profit-taking, which explains some step back in price. In spite of this, we continue to expect more growth from this bond as we believe it could reach a YTM of 9.75% compared to 10.3% today. Out target for the bond is located at 107 (9.81%) vs. 105.25 today. We are even more confident in Pyaterochka\'s upside as CenTel-4 continues demonstrating growth, also reaching a YTM of 10.3%. We believe that a fair level for CenTel-4 is 10%, which offers an additional price upside of 100bp. We also believe that Pyaterochka will trade at a discount to CenTel-4 from a credit standpoint, so as soon as the latter approaches 10%, Pyaterochka should break this level and go lower. TMK bonds are becoming hotter with every trading day. Yesterday exchange turnover in TMK-2 (size - RBL3bn, yield - 9.29% to put in 2 years) reached RBL40mln, which is very good for a second-tier corporate bond. The paper appeared on our buy list when it entered secondary trading, and since then has gained more than 100bp. Now we perceive its price upside as limited, but it is still quite possible that TMK-2 will reach a YTP of 9% in the nearest future, which means investors could buy the bond for an additional price gain of 40bp. Other bonds that look attractive in the sector from a relative value standpoint: Megafon-3 (YTM target 8.5%), Salavat-2, FSK UES, Lukoil. Short term market view On Wednesday, Russian companies will be paying VAT and part of the social tax for a total sum of about RBL130-140bn, which should result in a significant reduction of the balances in correspondent accounts and a jump in money market rates. Also, on July 25 the natural resource tax payment is due and on July 28 - profit tax. In short, the second half of the month will be tough from a funding standpoint, which will reduce demand for local bonds. We recommend caution regarding the interest-rate risk, although we do not expect anything dramatically bad will happen to the market as the paper deficit fuelled by the lack of large primary placements will counter the effect of high short-term rates. Price drops in the third decade of July should be seen as buying opportunities, so we are considering changing our current Hold recommendation regarding long bonds to a Buy around July 25. Dmitry Dudkin, Moscow (7 095) 755 5480 Economic commentary Industrial production solid In June, industrial production growth accelerated to 6.9% (YoY) - higher than expected Today, the FSSS released its industrial production figures for June, which exceeded expectations. Growth accelerated to 6.9% (YoY), resulting in a cumulative figure of 4% for 1H05 as a whole. As expected, raw material production did not contribute to June\'s growth spike. Despite Urals averaging US$45.2/bbl, or some 50% above 1H04\'s average level, oil production rose only 2.7% (1H05/1H04), which can be attributed to the drop in Yukos\' production, the worsened climate for the oil sector in general, and increased tax pressure on the oil sector. In a contrast, growth in manufacturing goods production was very impressive at 10.9% (YoY) in June, although the structure of this growth does not look encouraging for its further acceleration. June\'s spike was driven by a seasonal increase in certain machinery branches - which unfortunately is not stable (for example, in May manufacturing production expanded by just 1.6% (YoY)). Despite this, we maintain our forecast of industrial growth at 5.5% in 2005 as a whole. Investment implications: Although June\'s acceleration is not a stable trend, we welcome the strong results in industrial production growth and maintain our forecast at 5.5% for 2005 as a whole. Usually in Russia, statistical data releases do not significantly impact markets, but nevertheless the first good news in industry sector from the beginning of the year is encouraging. Julia Tsepliaeva, Moscow (7 095) 755 5489 For full info please visit our Web site at www.ing.ru.
July 18, 2005
ING Wholesale Banking Russia Russian Fixed Income Weekly
Story of the week: Outside view
Description
FX and money market Last week the rouble was strongly correlated with the euro, making it very volatile. The CBR was constantly present in the market, immediately correcting the RUR/US$ exchange rate when the euro rose or dropped. Following the euro’s mid-week appreciation to US$/EUR1.22, the rouble strengthened to RBL/US$28.58 but then dropped to RBL/US$28.648 at the end of the week. This week, rouble volatility is very likely to remain high and the CBR will keep the rouble strongly linked to the euro. Thus, the range for the rouble is likely to widen this week to RBL/US$28.55-28.75. Although today rouble liquidity was good with interbank rates around 2%, we expect a mid-week squeeze on the back of large (RBL130-140bn) tax payments scheduled for 20 July which may additionally support the rouble this week. Moreover, we do not expect any significant change in the CBR’s FX policy from now until the first half of August. Nevertheless, factors driving macroeconomic fundamental cannot be ignored in the long-term. The rouble is likely to strengthen against the dollar and become less correlated with the euro by the end of the year. We maintain our view for the rouble at RBL/US$27.5 by end-2005. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market Summer is finally coming into power in Moscow and whatever else you might think of them, traders are also people: with more market participants on vacation, trading turnovers on the domestic bond market are falling. Last week’s aggregate exchange volume was the lowest since May both in the corporate (RBL11.7bn) and municipal sectors (RBL6bn), and only in government bonds did the secondary market have more or less average liquidity. Another reason for such calm is the absence of any significant primary placements - again is largely explained by the traditional summer slowdown. Nevertheless, turnover reduction did not weaken the market as, similar to the previous week, this one produced largely sideways movement with a hardly visible positive tendency. External factors influencing the market were also neutral. Russian Eurobonds were almost unchanged with Russia’30 standing still the entire week at 111. Nevertheless, there’s one important thing here to note: the spread between Russia’30 and US10Y narrowed on Thursday to a new historical minimum having tested the unprecedented level of 145bp. This did not happen in isolation from the outer world: the spread narrowing activity was at the same time seen in other emerging markets, and Russia’s spread to Mexico remained unchanged with Russia’30 trading almost exactly on the Mexican government yield curve. Money market conditions were relatively bad at the beginning of the week (1-day MIBOR 5.05% on Tuesday), then rouble deficit unexpectedly eased (MIBOR fell to 2.73% on Thursday), but now the short-term rates are again beginning to grow (currently MIBOR is at 3.51%). On July 15, the payment of social tax was due, but its negative effect was partly compensated for by the exercise of a put option written by the CBR on OBR-1. On Friday the CBR bought back about RBL17bn of these bonds improving liquidity of the banking system. During the week the rouble exchange rate remained in a consolidation phase following the euro exchange rate that slowed down its downward movement. Government Bonds Over the week, this sector earned holders a weighted average return of 14.1%, which is good, taking into account the relatively low yield levels of government bonds. This result was largely attributed to growth at the long end of the curve, where OFZ 46018 (the longest bond) was the definite price leader gaining 40bp in price and thus reducing its yield to maturity in 16 years by 5bp to 8.65%. A draft of the government’s program for internal borrowing in 2006 was made public last Monday. In short, MinFin is planning to issue RBL238,2bn of rouble bonds in 2006, which, taking into account debt redemption of RBL68.44bn, will constitute an internal debt increase of RBL169.76bn in comparison to RBL125bn planned for 2005. This plan falls logically into the often-stated goal of shifting the government’s borrowing focus from the external to the internal market. In addition, this program gives some insight into where MinFin sees rouble interest rates in 2006: issues with a term of 1 year are expected to remain under 6%, intermediate-term notes – under 7%, and long-term bonds – under 8.5%. This guidance supports our view that OFZ 46018 (at 16 years, the longest bond on the curve) is currently undervalued yielding 8.65% to maturity. A simple glance at the yield curve tells us that with the goodwill of controlling entities such as Sberbank, yield of OFZ 46018 could easily fall below the 8.5% line, perhaps reaching 8.25%. We see the recent growth of OFZ 46018 as a beginning of this adjustment. Apart from OFZ 46018, only OFZ 25058 continues to look undervalued on the OFZ curve. The bond now has a YTM of 6.98%, while the yield curve shape suggests a fair level for this bond at 6.75-6.8%, which translates into a price growth potential of 50bp. On July 20, the CBR will be auctioning an additional RBL16bn tranche of OFZ 25057. At the moment, the paper is yielding 7.42% to maturity in 5 years, so we believe it is reasonable to start bets for it from 7.5% and upwards. 7.5% YTM on the auction date will correspond to a price of 100.375. The tactics are as usual: get the bond at the auction and then cash profits in a day or two. We will publish updated pricing for the bond just before the auction on Wednesday morning. Municipal Sector Municipal bonds saw little action last week. The sector earned a return of 13%, which is lower than that of OFZs, especially taking into account the fact that the average yield of municipal bonds is considerably higher. We have already mentioned that trading activity was quite low in the sector this week with basically the same bonds being volume leaders as usual: Moscow-39 (RBL1.1bn), MosReg-5 (RBL0.9bn), Moscow-41 (RBL0.8bn). Exchange turnover for MosReg-5 fell 3 times in comparison to weekly turnover for the bond a month ago. Price leadership was held by intermediate-term Moscow bonds this time: Moscow-41 (5 years, +46bp), Moscow-35 (1 year, +36bp), Moscow-29 (3 years, +30bp). Worse dynamics were demonstrated by the following issues: Moscow-32 (-18bp), MosReg-5 (+0bp), Moscow-42 (+0bp). In essence, price shifts over the week were so small that they were comparable to the average bid-ask spread in the sector, which has been recently very stable close to 40bp. Considering this, we can say the sector was flat in its price movement. For the next couple of weeks, we have only two definite trading ideas for the municipal sector. First, since we are counting on yield reduction at the long end of the OFZ curve, Moscow-39 remains the most attractive asset on the Moscow curve. Currently the bond is locked for coupon payment due July 21, but after that if the yield of OFZ 46018 goes under 8.5%, Moscow-39 will be able to move under the 8% level and reach 7.9% against most recent 8.08%, which constitutes a price upside of 100bp. Second, MosReg-5 remains a strategically attractive bond as it still yielding the same 8.37-38% as MosReg-4 that has a longer duration. Our current target for MosReg-5 is 8.25%, but as the level is reached we will possibly move it further down to 8%. Corporate Bonds Perekryostok – a large Russian supermarket chain - successfully auctioned its debut bond issue on July 12 selling the entire offered size (RBL1,5bn) with a coupon rate of 8.81%, which yields 9% to put in 1 year. 9% to put was the lower limit of the range recommended by us for this paper. Being quite short, this bond has no significant price upside, so the owners should be prepared for their holding period return to be close to the current yield level. The current week does not offer any interesting primary placement opportunities in the corporate sector. In secondary trading, corporate bonds earned 14.5% over the past week, which is the best result among the three market sectors in absolute terms, but still looks relatively poor taking into account the high coupons of third-tier bonds included in the calculation. Volume leaders for the week: Megafon-3 (RBL2.7bn), Pyaterochka (RBL1.7bn), CenTel-4 (RBL0.85bn). Price leaders: Pyaterochka (+120bp), Megafon-3 (+50bp), CenTel-4 (+46bp), RZhD-2 (+37bp), SibTel-4 (+30bp). As we can see, trading in corporate securities mostly revolved around second-tier issues, especially Pyterochka, Megafon-3 and CenTel-4. The first two bonds entered secondary trading on July 8 and were adjusting their position to current market conditions, which is why the immediately became turnover leaders. Nevertheless, we believe that the adjustment process is not over yet and undervalued second-tier bonds will continue to enjoy increased investors’ attention. Specifically, we believe that Pyaterochka is able to reach level 9.75% compared to current 10.28% to maturity in 5 years. Price target: 107 (current – 105.3). Megafon-3 (8.9% for 3 years) from a credit standpoint could easily trade below UrSI-5 (8.89%). We believe Megafon-3 could reach a yield level of 8.5% in a short-term perspective, which gives us a price target of 102 (current – 101.3). CenTel-4 – our favourite pick for more than a month, still has some upside potential. We consider it necessary that the bond trades at a premium to Pyaterochka, so our previous yield target for CenTel-4 – 10% – remains unchanged. Right now CenTel-4 has a YTM of 10.4% and from current price of 112 it could grow as high as 113.5. Other corporate bonds looking better then the market are: TMK-2, Salavat-2, FSK UES, Lukoil. Market View for Coming Weeks This week and the next are likely to be tough from a standpoint of rouble liquidity. On July 20, Russian companies have to pay the VAT and on Jul 25, the natural resource tax. Because of these payments overnight rates could reach June’s highs (10%) and even surpass them. It also cannot be ruled out that the euro exchange rate against the US dollar will attempt to storm recent lows at 1.1875, which will put the rouble under pressure and reduce demand for rouble bonds. In short, this week and the next have a chance to be the weakest in July, so caution regarding interest rate risk is recommended. Our current recommendation is a Hold after being changed from a Sell as we believe investors have had enough time to reduce average portfolio duration. Cash freed as a result of selling bonds can be used at moments of high short-term rates in repo transactions. We are planning to review our recommendation on Monday, July 25 as possible price drops might make long rouble bonds attractive. Dmitry Dudkin, Moscow (7 095) 755 5480 Story of the week Outside view July is usually a dead season for business activity in Russia. The Duma enjoys its vacations, political battles and debate on structural reforms are postponed to the winter session, and few government officials remain in their offices… It is not fun and sun for everyone, however, as preliminary results of the first half a year come on line and allow analysts to clarify their forecasts and consult their clients before holiday time. Last week I was in Europe marketing our new CIS quarterly report, which gave me an ample opportunity to meet our equity and fixed income clients and better understood their sentiments regarding Russia and the CIS region in general. The Yukos saga is gradually fading from investors’ memories. In February 2005 on the last CIS quarterly report marketing trip, almost all meetings began with questions about the political risk associated with Yukos. Investors had definite concerns about the risk of new attacks against companies and property rights in general. Although these concerns have not fully disappeared, our clients seem to have positively evaluated the additional efforts of the government to reduce political risks. We welcome the new “openness” of the Russian authorities and the deeper level of communication with the investment community (in June President Putin and PM Fradkov had a series of meeting with big foreign business), as well as the privatisation amnesty, which has been completely approved by the Duma, and capital amnesty, which is very likely to be approved in September. We also anticipate major steps in the right direction in September-October, when the Duma will consider crucial amendments to the Tax Code that which will limit ability of the tax authorities to apply the so-called tax claim method for property re-distribution in Russia. Investors are also looking favourably at the current macroeconomic story in Russia. Despite the evident slowdown in economic growth in 2005 relative to 2004, growth remains satisfactory in absolute terms, and the common view on oil prices remains very positive and encouraging for Russia’s economic prospects. High inflation looks to be the only fly in the ointment. To reduce inflation, the CBR is likely to change to FX policy already in 2005 to make its support of the dollar less aggressive and strongly reduce the current correlation between the euro/dollar exchange rate and the rouble. The rouble’s prospects for 2005 and the CBR’s policy choice are absolutely crucial for investors – as usual most of their questions related to FX policy. We maintain our optimistic view on the rouble and its appreciation to RBL/US$27.5 by 2005-end and believe the CBR’s choice to be rational. The rouble’s appreciation in 2H05 will make rouble bonds more attractive for investors and increase upward pressure on the equity market. We must also note growing investor interest in the rouble bond market. In 2004, few clients had any definite interest in rouble bonds, with most of them exclusively exposed to Russian Eurobonds. Recently, however, they have been making many enquiries about the rouble bond market and our local debt top picks. Drawing attention to this market was a healthy combination of good market liquidity, upside opportunity, and a relatively high return in dollar terms (rouble appreciation is on the horizon). Russian bonds are becoming more and more familiar to our clients – again, according to my very rough estimates, 60-65% of the FI clients I met last week asked quite detailed questions concerning Russian rouble debt. We believe that this is a very positive sign indicating both global processes and local improvements. As the biggest regional economy and main regional market, Russia remains the primary focus of the CIS region. Unlike the other CIS countries, Russia has no any problems with the liquidity of its secondary bond, equity, or FX markets - which is a very crucial factor in the eyes of investors. We fully share our clients’ optimism regarding Russia in 2005 and beyond. We believe in further macroeconomic and political stabilization, improving risk profile, and steady development of financial markets in the coming years. With further economic liberalization, Russia is likely to become more and more open for clients. We believe that its markets will be fully opened for foreign investors – for example, the government plans to “fully and once” free up Gazprom’s share trade already in 2005. This will be very encouraging for foreign investors, who are currently buying Gazprom shares in a form of ADRs at a premium to the local market. As a result of this liberalisation we also expect Gazprom capitalisation to increase to US$120bn. In 2007, Russia plans to completely liberalise its currency regulation, in the part of capital account operations. In the medium term, foreign investors are likely to receive access to the government segment of the rouble debt market. Julia Tsepliaeva, Moscow (7 095) 755 5489 For full info please see our Web site at www.ing.ru.
Raiffeisen Bank Russian Daily Monitor
B&N Bank Fixed Income Daily
ING Wholesale Banking Russia Russian Fixed Income Daily
- OFZ 25057 will be placed on July 20
- Pyaterochka and CenTel-4 retain upside
- Overall view for the end of the month - modestly negative
Description
FX and money market Last week the rouble was strongly correlated with the euro, making it very volatile. The CBR was constantly present in the market, immediately correcting the RUR/US$ exchange rate when the euro rose or dropped. Following the euro\'s mid-week appreciation to US$/EUR1.22, the rouble strengthened to RBL/US$28.58 but then dropped to RBL/US$28.648 at the end of the week. This week, rouble volatility is very likely to remain high and the CBR will keep the rouble strongly linked to the euro. Thus, the range for the rouble is likely to widen this week to RBL/US$28.55-28.75. Moreover, we do not expect any significant change in the CBR\'s FX policy from now until the first half of August. Nevertheless, factors driving macroeconomic fundamental cannot be ignored in the long-term. The rouble is likely to strengthen against the dollar and become less correlated with the euro by the end of the year. We maintain our view for the rouble at RBL/US$27.5 by end-2005. Julia Tsepliaeva, Moscow (7 095) 755 5489 Rouble bond market On Friday trading activity on the domestic bond market was quite low in the municipal and government sectors, while for corporate securities it remained at its average level. There again was no clear tendency in price movement and price volatility was quite low. The same mixed picture was seen in external factors influencing the market: the rouble exchange rate is currently in a consolidation phase, Russia\'30 has been basically unmoved since the end of June, and the money market is demonstrating increased short-term rates (1-day MIBOR at 3.5%), although they are not as high as three weeks ago. Government bonds The CBR bought back about RBL17bn of OBR-1 on Friday exercising a put option, which is much less than the RBL34bn reported to have been placed. This indicates that the CBR had been previously buying OBR-1 on the secondary market and only RBL17bn of this bond was outstanding on the put option date. This buyback operation helped to maintain the balance in correspondent accounts at its Friday level RBL242bn in spite of the social tax payment of Russian companies due on July 15. On July 20, the CBR will be auctioning an additional RBL16bn tranche of OFZ 25057. At the moment, the paper is yielding 7.42% to maturity in 5 years, so we believe it is reasonable to start bets for it from 7.5% and upwards. 7.5% YTM on the auction date will correspond to a price of 100.375. The tactics are as usual: get the bond at the auction and then cash profits in a day or two. We will publish updated pricing for the bond just before the auction on Wednesday morning. Corporate sector Price changes for corporate sector benchmarks in secondary trading: Gazprom-4 +5bp, Lukoil +4bp, RZhD-3 +9bp, FSK UES -14bp. Second-tier bonds: Pyaterochka +16bp, CenTel-4 +1bp. As we can see, the sector was more or less unchanged in prices, but some positive sentiment was still present. Since the market situation did not change much, our picks for today remain what they were on Friday: Pyaterochka (target 9.75%), CenTel-4 (target 10%), Megafon-3 (target 8.5%), TMK-2, Salavat-2, FSK UES, Lukoil. Short term market view This week is very likely to produce worsened money market conditions as on July 20, VAT is due, and later, on July 25, oil companies and Gazprom will be paying the natural reserve tax. It is quite possible that in the last decade of July we will see peaks of overnight rates reaching previous highs (10%+) and even surpassing them. It cannot also be ruled out that the euro exchange rate against the US dollar will attempt to storm recent lows at 1.1875, which will put the rouble under pressure and reduce demand for rouble bonds. In short, this week and the next have a chance to be the weakest in July, so caution regarding interest rate risk is recommended. Our current recommendation remains a Hold after being changed from a Sell as we believe investors have had enough time to reduce average portfolio duration. Cash freed as a result of selling bonds can be used at moments of high short-term rates in repo transactions. Dmitry Dudkin, Moscow (7 095) 755 5480 For full info please see our Web site at www.ing.ru.
July 14, 2005
B&N Bank TRADE IDEAS: LONG GAZPROM-13 VS. SHORT GAZPROM-34; LONG SEVERSTAL-09 & SEVERSTAL-14; LONG ALROSA-14.
ING Wholesale Banking Russia Daily Market Commentary
- Turnovers grow in the municipal sector
- OFZ 46018 and 25058 look undevalued
- Pyaterochka and CenTel-4 lead the corps...
Description
FX and Money market Yesterday, the rouble was seen around RBL/US$28.56-28.58. However, by the end of the day the dollar received strong support after the announcement that the US trade deficit in May had unexpectedly narrowed, and as a result, rose against the euro to US$/EUR1.2094. Consequently, the rouble lost 7 kopecks falling to RBL/US$28.64. Today, we expect the local currency to continue weakening following the euro and to trade in the range of RBL/US$28.65-28.70. In addition, the market is waiting for the release of yet more US macroeconomic figures today (June CPI and Retail sales), which will set the mood for further dollar trends. In the money market, low demand for short-term financing due to healthy rouble liquidity (NOSTRO balances rose to RBL255.8bn) is keeping overnight interest rates around 1-2%. Olga Golub, olga.golub@ingbank.com Rouble Bond Market Wednesday was quite a calm day on the domestic bond market. Trading activity fell in the corporate sector, but rose for municipal bonds. Buyers were more active than sellers and on average prices of rouble bonds marginally increased. Growth could have been larger if not for the fall of the euro against the US dollar in the evening, as the corresponding decline in the rouble exchange rate cooled the bulls down and triggered profit-taking in long Moscow bonds as well as some long corporate issues. On the other hand, throughout the day domestic bonds were supported with spread narrowing activity in Russian Eurobonds, where Russia\'30 was for the first time in its history trading with a spread of 145-147bp to US10Y. Government bonds Not much was happening here on Wednesday, although buying interest was evident and prices at the long end of the curve slowly drifted upwards. We continue to support the idea that yields of OFZ 46017 and 46018 are currently too high. On the other hand, if we look at the zero-coupon curve, there\'s actually a trough on it at the point corresponding to OFZ 46017, so we would not recommend it for buying. On the contrary, OFZ 46018 is at the highest point on the zero curve as well, and in addition, it has the largest duration providing highest possible capital gains. Therefore, OFZ 46018 with its 8.68% to maturity looks more attractive that OFZ 46017. Our target for OFZ 46018 is set for 8.4-8.5%, but we do not consider the current moment to be the best for buying. Since price adjustment on the OFZ curve is likely to take several weeks and possibly months, it\'s better to increase one\'s position in OFZ 46018 on price drops that we should see later this month, probably in the last decade of July. Apart from OFZ 46018, only OFZ 25058 continues to look undervalued on the OFZ curve. The bond now has a YTM of 7%, while its yield curve shape suggests a fair level at 6.75-6.8%, which translates into a further price growth potential of 60bp. Municipal sector As we mentioned before, trading activity increased in the municipal sector yesterday with the attention of traders drawn to several Moscow issues, Moscow Region, and Yakutia bonds. Price changes for most traded papers: Moscow-35 +7bp, Moscow-29 +19bp, Moscow-39 +5bp, MosReg-5 +5bp, Yakutia-6 +3bp. On the Moscow curve, the most interesting issue is currently Moscow-41, which is yielding 7.72% to maturity in 5 years - up to 10bp above its fair level. Moscow-39 (the longest Moscow bond so far) has very limited upside potential, as it is located on the OFZ curve and is unlikely to cross it downwards. This does not preclude growth, however, but such growth would only be possible together with the overall market, which we are more likely to see later at the beginning of August. MosReg-5 remains obviously undervalued relative to other Moscow Region issues, as it has the same YTM as longer MosReg-4 (8.38%). In current market conditions the fair level of MosReg-5 can be estimated at 8.1%, which is 15bp below our previously stated target. Possible price upside thus grows to 60-70bp. Corporate sector Price changes for sector benchmarks in secondary trading: Gazprom-4 +6bp, Lukoil +6bp, RZhD-3 +8bp, FSK UES -4bp. Second-tier bonds: Megafon-3 -2bp, Salavat-2 +14bp, UrSI-5 +20bp, CenTel-4 +33bp. UrSI-5 grew 20bp yesterday, giving approximately 50bp cumulative growth since the bond was put on our buy list at the end of June. The bond looks fairly valued now, but retains some upside potential together with other second-tier issues, in the general process narrowing its spread to first-tiers. As a result, we are switching our view on UrSI-5 to Neutral. Instead it would be wiser to look at Megafon-3, which from a credit standpoint, should trade at a discount to UrSI but is currently yielding 8.92% to maturity in 3 years vs. 8.88% for UrSI-5. We locate our target for Megafon-3 at 8.6%. The growth competition between Pyaterochka and CenTel-4 continues. Right now, Pyterochka is yielding 10.3% to maturity in 5 years, while CenTel-4 has reduced in yield to 10.4%. The two bonds remain on our buy list with targets of 10% and 9.75-9.8% for CenTel-4 and Pyaterochka respectively. Other top corporate picks for today: TMK-2, Salavat-2, UrSI-5, FSK UES, Lukoil. Short-term market view The next two weeks look more dangerous than the current one from the point of view of interest rate risk, so we recommend investors to be prepared for possible price drops. Additional caution should be taken looking US Treasuries that are slowly, but steadily increasing their yields deviating further from 4% level (for US10Y ). This is nothing dramatic so far, but may provoke some additional selling in high-grade rouble bonds. Therefore, our general recommendation regarding long bonds remains a Sell as we advise seeing current upward jumps in prices as opportunities for profit-taking. However, it is unlikely that rouble bonds will experience a full-scale downward correction in the second half of July, so papers with good growth prospects relative to the market, such as OFZ 25058, MosReg-5, CenTel-4, Pyterochka, and Megafon-3, should be left on position. Dmitry Dudkin, dmitry.dudkin@ingbank.com For full info please look at our web site www.ing.ru.
July 13, 2005
B&N Bank Better buyers: MDM 05, Evraz 09, WBD 08, Sistema 11, Alrosa 14, Gazprom 34, Ritzio 07
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170
countries
+7 812 336 97 21
pro@cbonds.info
200 000
issues: local and international bonds
170
countries
Сbonds is a global Fixed income data platform
+7 812 336 97 21
pro@cbonds.info
Data
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Cbonds is a global fixed income data a platform
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