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March 30, 2005
VTB Capital Fixed Income Comment: Despite early morning selling into strength, Russian eurobonds recovered in late trading
Description
Despite early morning selling into strength, Russian eurobonds recovered in late trading following the firming in UST and closed marginally higher over the day. As a result of such moves, Russia’s EMBI+ index posted a 0.19% gain with the spread widening by 2 bps to 211 bps. Nevertheless, the move lagged the overall EM debt benchmark performance and with Mexican external debt also outperforming, the Russian spread over Mexico’s sovereign curve erased the previous day’s gains and widened to 25 bps. Volumes were somewhat modest and trading was largely confined to the more liquid issues, namely RU28 and RU30. The latter opened at a 1011/8 and traded lower to 1003/4 before a bout of short-covering across UST markets took hold, largely in response to the weaker consumer confidence data, and the benchmark bond recovered to close in New York at 1013/8. Indeed, with 10-year UST yields declining from 4.642% to 4.575% the move in RU30 led to a modest compression in spread levels, with the RU30 spread tightening from 219 bps at the day’s low to 216 bps at close. Although RU28 also traded higher over the day, the move failed to keep pace with the benchmark bond and the spread over RU30 widened from 44 bps at opening levels to 47 bps. Elsewhere in Russia, the ARIES curve shrugged off the ongoing noise regarding Russia’s Paris Club repayment negotiations and the more liquid ’14 issue traded higher from 1183/4 to 1191/8. While both corporate and banking sector eurobonds were relatively inactive, certain issues were better bid as market participants continue to look for value across the higher yielding credits. Russia has opened this morning on a firmer tone with the benchmark RU30 trading in 1011/2-1015/8 range (+215 bps to +214 bps over UST) and we expect this current momentum to result in further spread tightening over the near-term. While the main market focus remains entrenched on tomorrow’s PCE deflator and Friday’s NFP data, the key data highlights today include mortgage applications, personal consumption, final Q4 GDP estimates and price deflator. At the same time, the US$24 billion auction of 2-year UST notes will also be closely watched for insight into the level of both domestic and foreign risk appetite towards UST paper, particular given the sharp rise in yields at the short end of the curve in recent months.
Raiffeisen Bank Daily Market Monitor: Russian external debt outperformed emerging-market debt Tuesday as investors seemed to recognize Russia’s relatively defensive stance
Description
Domestic debt will continue to watch FX market dynamics Wednesday, where the tendency towards rouble depreciation against the dollar has slowed following the widespread liquidation of short rouble positions on Tuesday. The Central Bank’s exchange rate policy is the key component to watch, although, given its unpredictability, the best policy for rouble bond investors is to remain on the sidelines until the situation surrounding exchange-rate policy is clarified. Moreover, the end of the month (and quarter) could bring a decline in domestic liquidity — overnight rates are now at 1.5-1.75%. The large number of primary placements scheduled for next week (Rub 20 bln worth of new bonds) should put additional pressure on the secondary market. Russian external debt outperformed emerging-market debt Tuesday as investors seemed to recognize Russia’s relatively defensive stance on the back of its strong budget surplus and the fact it has little need to seek refinancing. Russia’s intention to repay Paris Club debt has become more pronounced of late — a development likely to help the Russian sovereign spread to tighten by 15-20 bps. Yet, expectations of more aggressive rate hikes from the Federal Reserve have turned investors remarkably risk-averse in the past two weeks. All market attention should be on important U.S. data releases at the end of the week — expect rather sluggish trading while investors prepare for their next wave of euphoria or doom. The Russia’30 climbed to 101.063% Tuesday, while its yield remained almost unchanged (down 5 bps). The sovereign spread, meanwhile, expanded by an insignificant 2 bps to 212 bps.
March 29, 2005
B&N Bank Fixed Income Daily: Russian Eurobonds renewed their lows since November 2004 last week after a new interest rate hike by the US Fed
Description
EXTERNAL DEBT MARKET Russian Eurobonds renewed their lows since November 2004 last week after a new interest rate hike by the US Fed, driven by the expectations of faster interest rate increases in response to higher inflation. Against this background, the 10Y UST yield increased noticeably to 4.60-4.68%. The Russia-30 was as low as 100.375 (traded at a spread of 220 bp) in the middle of the week. Nevertheless, the benchmark bond recovered to 101.500 (a spread of some 210 bp) by the weekend. Russian corporate Eurobonds also fell considerably, with their yield spreads over Sovereigns widened by 10-20 bp over a week and 30-50 bp over a month. The data that are very important for the US Treasury market and for the Fed Funds rate expectations are due out this week. In particular, the US GDP and GDP deflator figures are to be published on 30 March, and, most importantly, the number of new jobs in the US is to be made public on April 1. If the data go above the projected levels, the yield of the 10Y UST may quite quickly rise to the last year’s high of 4.80-4.85%. Otherwise, the yield of the 10Y UST will tend to 4.40% At yesterday’s market open in North America, the Russia-30 fell to 100.500 (the spread was above 220 bp). Today, the price has recovered to 101.00- 101.375 (the spread is 210 bp). Apparently, the recent negative developments in the Russian Eurobond market have been fueled by not the US Treasury market alone but as well by controversial information from the negotiations between Russia and the Paris Club. The demand of Germany to pay a premium of 5-10% at early debt redemption may seriously complicate the negotiations. The absence of a compromise is negatively treated by investors and results in the widening of the country spread. We believe that the transaction between Russia and the Paris Club will take place in any case, as it is beneficial to both parties. The only issue that remains doubtful, in our opinion, is the time when an agreement may be achieved, but the transaction may probably be completed in 2005. Therefore, the transaction would positively affect the market of Russian Eurobonds, the question being – when. We remain moderately optimistic and believe that this volatility is a good opportunity to buy. We believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET Selling prevailed in the market yesterday, as a consequence of USD growth and persisting tension in the Eurobond market. Also, inter-bank overnight rates are unusually high at 1-2%. Most probably, the increase in inter-bank rates is largely due to the changing mood of players in the currency market rather than any real shortage of rubles in the banking system. The voices of pessimists in the Eurobond and currency markets sound yet stronger, which results in persisting selling in the market of ruble bonds, where investors have been lacking distinct ideas for already quite a long time. It should be noted that the current situation practically completely follows the market pattern of 2004. In late 1Q04, the expectations of global interest rate increases built up, which caused USD growth and entailed a collapse in the Eurobond market. This then resulted in rather fast outflow of “hot” foreign capital and shrinkage of ruble liquidity, giving rise to higher yields on ruble-denominated papers. The situation now is practically the same, but there is one (and the most important) difference. At present, the level of ruble liquidity is considerably higher (2-3 times higher than a year ago), whilst the measures of the Central Bank undertaken to stabilize the banking system allow to argue that a considerable portion of free rubles is of Russian origin. Even if non-residents withdraw their funds from the ruble bond market, essential support to the market can be already rendered by Russian investors who lack opportunities to withdraw their funds. Nevertheless, rate increases are inevitable in the ruble debt market in the long-term prospect.
Alfa Bank Fixed Income Market Weekly: Bonds will likely consolidate at their current levels this week
Description
Bonds will likely consolidate at their current levels this week. Volatility will increase on the global debt market in reaction to the results of the placement of 2-year US Treasuries (March 30) and the publication of the PCE deflator (March 31).
VTB Capital Fixed Income Comment: Both Russian and EM debt suffered yesterday as UST prices resumed its recent downward path, albeit in the absence of any data driven event
Description
Following Friday’s closure of US and European markets, both Russian and EM debt suffered yesterday as UST prices resumed its recent downward path, albeit in the absence of any data driven event. As a result of this move, Russia’s EMBI+ index lost 0.2% with the spread unchanged at 209 bps, its widest level since end-January. Still, the move itself lagged the sell-off across other benchmark EM credits, namely Brazil and Mexico, and as such, the Russian spread over Mexico’s sovereign curve compressed further to 19 bps and at this level remains only 3 bps wide of its tightest point to date (achieved in the aftermath of Moody’s Baa3 upgrade in October 2003). Despite UST markets remaining active yesterday, trading across Russia’s sovereign curve was relatively thin and the price moves in the benchmark bond clearly reflected this illiquid status. That is, RU30 traded lower from 1011/2 on the bid side in Moscow time to 1009/16 in New York, at which the spread over 10-year UST reached the widest point in this current correction period, at 220 bps. With London and European open today, Russia opened on a firmer tone and the benchmark bond has since traded in a 1007/8-1011/8 range (+218 bps to +215 bps over UST), albeit with the pattern of trading being characterised by selling into strength. Moreover, reports suggesting that a senior German government official has called on Russia to undertake a sizeable premium on its proposed early repayment of Paris Club debt may lead to selling pressures across the ARIES curve. Once again, with ongoing risk aversion towards both EM and global fixed income the US economic data calendar and subsequent movements in UST will dominate the general tone for EM debt this week. While the key data highlights include consumer confidence (today), Q4 final GDP estimate (Wednesday), personal income, expenditure, jobless claims, Chicago PMI (Thursday) and ISM survey (Friday), the main focus will remain on the all important NFP data release and associated labour market indicators. At the same time, in view of last week’s concerns regarding mounting inflationary pressures, particular attention will also be given to the GDP and PCE price deflator releases, with the latter remaining Greenspan’s preferred measure.
Raiffeisen Bank Daily Market Monitor: Upcoming economic releases from the United States are of particular importance as they should build expectations
Description
The rouble bond market felt the affects of Monday’s rouble depreciation, with a correction across the board. We do not, however, expect the correction to be deep as the yields are already relatively high (anyone who wanted to unload their portfolios had time to do so). In the meantime, significant uncertainty on the interest rate side makes long papers too risky now. Participation in primary placements looks like a more profitable strategy in the short-term. The Eurobond market was dormant on Monday due to holidays in the West. However trade is likely to become more active in coming days. We see the significant correlation between Russian Eurobond prices and benchmark dynamics persisting in coming days. After significant recent increases in global interest rates following the U.S. Federal Reserve comment on the U.S. economy, the market is in need of facts to confirm U.S. interest rate plans (and thus their likely effects on emerging markets). Upcoming economic releases from the United States are of particular importance as they should build expectations. The release of U.S. consumer confidence index (expected at 103 in March) is scheduled for Tuesday, while the more important figures are expected later. Wednesday will see U.S. annualized GDP, GDP price deflator and personal consumption figures, with personal income, spending and jobless statistics due Thursday.
March 28, 2005
Alfa Bank Non-Government Ruble Bond Market
Description
Investment Summary 1. Blue chips. We think that TNK-5 bonds are somewhat overvalued compared to Gazprom-3 issue. TNK-5 offer 6.6% p.a. to 1.5-year maturity, while Gazprom-3 is trading at 7.3% p.a. to 1.7-year maturity. 2. Metallurgy After the start of secondary trading Svobodny Sokol (metallurgy) gained 2.8% but still has price growth potential. The issue offers 40-60 bpts premium to the secondary market, which is likely to be offset in the short-term. 3. Primary Placements At the beginning of April a number of large-scale municipal issues will be offered to investors. In particular, it will be Moscow Region bonds for RUR12 bln – the largest placement in the history of nongovernment debt market. We expect this issue to be sold within a day and impressive demand on the part of investors will likely provide the auction yield to be close to the secondary market rates. Investment Summary
Raiffeisen Bank Daily Market Monitor: The rouble bond market emained muted on Friday
Description
The Facing uncertainty in both interest and exchange rate dynamics, the rouble bond market remained muted on Friday — although high rouble liquidity acted to support Russian papers. With these factors likely to remain in play all week, the primary market should offer the most opportunities to investors. Several auctions are scheduled this week – PIT investment is to place its second bond issue for Rub 1.5 bln on Monday, while three issues – Incom-finance (Rub 1.5 bln), TMK-2 (Rub 3 bln) and Salavatsteclo (Rub 750 mln) are scheduled for Tuesday. However, significant supply in the coming month (Moscow city plans to place Rub 6 bln on April 6, while the Moscow region plans a Rub 12 bln issue a day before) could bring risk for the primary market as well. Meanwhile, Vneshtorgbank executed a put option on its VTB-4 bond. According to the company, Rub 3 bln of Rub 5 bln was bought back as investors considered the proposed rate for its next coupon of 5.6% as too low in the current environment. The Russian Eurobond market saw little change on Friday due to the public holiday on Western markets — and Monday is likely to remain muted. We expect local activity to recover tomorrow, on the heels of the market’s Western peers as Russian Eurobonds are likely to continue to follow U.S. Treasury dynamics. We see the latter following Thursday’s statistics on U.S. jobless claims, personal income and factory orders.
March 25, 2005
Raiffeisen Bank Daily Market Monitor: We don’t believe foreign investors are likely to start increasing their rouble bond positions soon
Description
The rouble bond market remained uncertain on Thursday, as the negative influence from growing global interest rates and rouble weakening against the dollar were finally outweighed by significant purchases from large local players. However, we don’t believe foreign investors are likely to start increasing their rouble bond positions soon — which would leave a lot of risk in long-term first-tier bonds. Shorterduration bonds with higher yields look like the more defensive option in the current conditions. The Russian Eurobond market saw little change on Thursday in the absence of significant news either from benchmarks or the local market, although U.S. economic releases (jobless statistics and durable goods orders) were slightly weaker than expectations. In the meantime we do not expect anything significant on Friday, particularly due to the holiday on western markets.
March 24, 2005
B&N Bank Fixed Income Daily: We recommend buying the Russia-30 at the current levels
Description
EXTERNAL DEBT MARKET The slump in emerging bond markets yesterday morning was short-term and gave way to steady buying by the evening and this morning. The main intrigue yesterday was the US CPI. Inflation appeared to be above expectations (+0.4% against +0.3% expected), which caused the yield of the 10Y UST to spike to 4.68% from 4.62% earlier. Against this background, the Russia-30 was as low as 100.375 (the spread was about 220 bp), but the price recovered rather quickly, and the bond closed in London near 101.500 at a spread of 210 bp. Today, the yield of the 10Y UST has eased by 10 bp to 4.59%, causing the Russia-30 to grow to 101.750-102.00, while the spread has remained at 210 bp. Worth noting is no buying interest in Russian corporate Eurobonds, with extremely few buyers now. These papers’ spreads over Sovereigns have added approximately 30-50 bp during one month. We remain moderately optimistic and believe that this volatility is a good opportunity to buyWe believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET Selling continued in the ruble debt market, but neither frontally nor aggressively. Most first-tier issues lost 0.1-0.3% on relatively low turnover. The long OFZ yield curve was up only 5-10 bp from the beginning of the week at 7.65-8.75%. Some second- and third-tier issues (mainly shortdated) saw quite healthy demand. In other issues, selling was not panic. Despite the ongoing fall of emerging markets and strengthening of the US dollar, the ruble debt market looks quite strong. The logic is simple. The market had stagnated quite long, and for many investors it was logical to partially take profits on expectations of interest rate increases and the fall of emerging markets. In the absence of other excuses, this is a good one for some unloading of portfolios. But what sense does it make to aggressively liquidate positions in ruble papers (this is especially true concerning short-dated second- and third-tier bonds) and close out at a loss because of UST yield increases or USD strengthening in the world market? The more so against the backdrop of persistent excess supply of rubles. Yes, if the fall of emerging markets (including the Russian stock market) assumes the character of a frontal collapse, it may be possible to gradually cash out from part of positions. But presently there are no sufficient preconditions for that.
VTB Capital Fixed Income Comment: With current valuations largely being seen as a buying opportunity Russia has opened this morning on a firmer tone
Description
As expected, upside risks to the US inflation profile, both headline and core CPI measures above consensus, resulted in a further sell-off in UST yesterday and consequently EM debt was marked lower. Despite a late recovery in UST, albeit largely due to short-covering and initial fears that this rally maybe provisionally oversold, both the Russian and EMBI+ indexes posted declines and fell 0.6% and 0.8% respectively. At the same time, spread levels widened further with the Russian EMBI+ spread increasing 5 bps to 209 bps, its widest level since end- January. More importantly, the overall EMBI+ spread broke through the key 381 bps level to reach 389 bps, its widest level since mid-November 2004, and as such, has eroded the 2005 YTD gains. With volumes extremely heavy the benchmark EM issues were actively traded and RU30 opened at 1005/8,moving lower to 1003/8 before recovering in late session to close at 1011/2. A move that resulted in the RU30 spread over 10-year UST widening initially to 222 bps and then contracting to around 208 bps at close. Similarly, RU28 was also actively traded with the spread over RU30 residing in a 45-46 bps range. Across the corporate and banking sector eurobonds, the more liquid longer duration credits were marked considerably lower, and the Gazprom, VTB, MTS and Severstal credits underperformed, with sporadic selling into low bids. With current valuations largely being seen as a buying opportunity Russia has opened this morning on a firmer tone and the benchmark bond has traded higher to reach 1023/16 (+205 bps over UST). Still, we expect this rally to remain shortlived and view it more as short covering ahead of the long weekend. Looking ahead, the market will continue to reassess the implications of this week’s inflation data and also refocus on the forthcoming NFP release. From this viewpoint, and also taking into consideration that US core inflation has reached its highest y-o-y rate since August 2004, this confirms the Fed’s concerns regarding upside inflation risks, and we view 4.90% as the key target level for 10- year UST yields. Accordingly, EM debt will remain vulnerable to any contagion impact from higher US yields and ongoing risk aversion. Moreover, given the high liquidity status of the benchmark RU30 bond, and its use as a hedging instrument, this implies that over the short-term any offloading in EM assets will result in more adverse moves in Russia’s overall external debt performance. Over the short-term we anticipate further bouts of selling into strength and view 1021/4-1/2 as the likely selling point for RU30.
Raiffeisen Bank Daily Market Monitor: On Thursday, further price slumps (on domestic debt market) cannot be excluded given increased yields on Russian external debt
Description
Thursday’s bond market dynamics were predictable following the U.S. Federal Reserve’s relatively aggressive statement accompanying Tuesday’s interest rate hike. With the dollar 7 kopecks higher, local bonds could not resist the trend sweeping through all emerging markets, and yields rose with few exceptions. Longer-term, the outlook for this segment does not look too bright either, with the prospect of significant nominal rouble appreciation over the year diminished somewhat after Russian policymakers raised the inflation target to 10% from 8.5%, while again talking of an implicit nominal exchange rate target. On Thursday, further price slumps cannot be excluded given increased yields on Russian external debt. After above-consensus U.S. CPI figures were released Wednesday, the slide in Russian Eurobond prices gained momentum. Over the day, the EMBI+ Russia index lost 0.6%, while the spread widened by 8 bps. While a tendency for widening spreads at higher rates is universal, we believe that Russian external debt is well supported by the Paris Club talks and should prove less volatile than those of most other emerging markets.
March 23, 2005
B&N Bank Fixed Income Daily: Sovereign spread out to 215 represents a good entry point for spread trade
Description
EXTERNAL DEBT MARKET As always, the main clues from the US Fed meeting on interest rates were in the comment to the decision. As had been expected, the US Fed raised its rate by 25 bp to 2.75% annual and reiterated its outlook for future moderate rate increases. However, the Fed noted that inflation had been accelerating recently, which might become a potential threat, and did not rule out adequate action in the future, i.e. toughening of the monetary policy. De facto, this means that the US Fed may speed up interest rate hikes if necessary. This is what has seriously upset investors. All the segments of the global financial market saw serious selling. Bonds, stocks and commodities are seeing considerable price falls. Following the Fed’s comment, the yield of the 10Y UST, which had been 4.47% previously, increased sharply to 4.62%. The US dollar is sharply stronger from 1.32 to 1.3030 USD/EUR. As a result, the Russia-30, having been around 102.500 a few minutes before the Fed decision, fell to 101.00, and even saw panic deals at 100.625 this morning. The spread has widened to 220 bp. We remain moderately optimistic and believe that this volatility is a good opportunity to buyWe believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET The market recovered somewhat yesterday, as most first-tier corporates were up 0.2-0.5% on more turnover. Trading was rather dull in the second tier, with purchases prevailing. This morning, the first reaction of the market to yesterday’s FOMC comment following another 25 bp interest rate hike to 2.75% has been negative. Most issues have opened below yesterday’s close, but selling has met with support on the part of buyers quite soon. If we were to make a momentary snapshot of the ruble debt market, practically all the key factors would be on the bear side. The Eurobonds continue falling, the Russia-30 spread over the 10Y UST has widened to almost 220 bp (in line with the entire emerging debt market), and the ruble has begun weakening again in response to USD strengthening in the global forex market. The expectations of faster global interest rate increases are mounting among investors, which means capital outflow from emerging markets in a longer term. At the same time, the yields in the ruble debt market are fundamentally unattractive for Russian investors. Such a development is completely in line with our moderately negative forecast of interest rate increase in the market by 100-150 bp for the year (see the details in our Bond Market Strategy for the year). Nevertheless, we would not overdramatize the situation now. In the first place, the Sovereign spread of Russian Eurobonds is evidently excessive and does not correspond to the macroeconomic realities of the country. We expect the spread to narrow to 150 bp given virtually any development in the UST market, which means quite good medium-term support for the ruble debt market. In the short term, we do not see any reasons for aggressive position liquidation in the market. The past correction and excess ruble liquidity allow to expect relative stability at the current yield levels. Most probably, the market will remain highly volatile owing to a great number of speculatively-minded Russian investors. However, we would not call it overall deterioration of the market situation yet.
Raiffeisen Bank Daily Market Monitor: Positive sentiment returned to the rouble bond market on Tuesday on the back of the stable rouble and relatively attractive yields
Description
Positive sentiment returned to the rouble bond market on Tuesday on the back of the stable rouble and relatively attractive yields. However, Wednesday’s expected move in the exchange rate and increases in global interest rates could balance the positive sentiment, although we do not expect the negative influence to be significant. Meanwhile, the Central Bank plans a secondary auction of its OBR-2 issue for tomorrow. Rub 10 bln would be offered with the put option set for September 15 2005. The Central Bank already placed Rub 35.8 bln of its total Rub 98.5 bln issue on Mar 15. The Russian Eurobond market saw little change on Tuesday, although a major decline may be seen Wednesday in the fall-out from the FOMC rate changes. The UST’10 yield increased 13bps to break the 4.6% level. As the increase in benchmarks yields could induce widening in the Russian spread, we expect a more significant move in Russian papers’. Particularly, Russia’30 price, which could decline by 1.5%. Such a significant decline could also be explained by fund outflow to less risky assets from emerging markets. As for Wednesday’s drivers – the release of U.S. February CPI (0.3% expected) and mortgage applications could influence the market.
VTB Capital Fixed Income Comment: Russia has opened this morning under renewed selling pressures
Description
As expected the Fed increased its Fed Funds rate by 25 bps to 2.75% yesterday and retained its ‘accommodative’ and ‘measured’ stance. Nevertheless, the modification in the language to include ‘with appropriate monetary policy action’ was interpreted by the market as presenting a more hawkish undercurrent and in response, global fixed income sold-off. That is, the yield on the 10-year UST note rallied from around 4.47% to break though key technical levels and close at the day’s high of 4.64%. As a result of such moves, EM debt also suffered and the benchmark issues were all marked lower as the EMBI+ index lost 0.63% with the spread widening 7 bps to 374 bps, its lowest level in over 2 months. Similarly, Russian external debt also witnessed selling pressures and the Russian EMBI+ index declined 0.37% over the day with the spread widening 3 bps to 204 bps. Activity in Russia was largely confined to the more liquid benchmark bond, and RU30 traded pre-FOMC announcement in a relatively narrow band, opening at around 1023/8 and moving lower to 1021/4 with the spread over 10-year UST holding in a 208-211 bps range. Despite briefly spiking to 103 post-FOMC announcement, across the board selling pressures led the benchmark bond lower to touch 101 and the spread subsequently widened to 217 bps. Elsewhere in Russia, few trades actually occurred and prices across the MinFin, ARIES and corporate eurobonds were marked lower accordingly. Russia has opened this morning under renewed selling pressures and the benchmark RU30 has traded lower from 1015/16 to 1005/8 with the spread over UST widening further to 222 bps. Although following yesterday’s sharp retraction in UST yields we would expect an initial bout of short covering to provide support over the near-term, Russia continues to remain vulnerable to heightened risk aversion towards EM debt and the contagion impact from US rates. Moreover, today’s all-important US CPI release continues to cast a shadow over sentiment and market participants are likely to remain cautious ahead of this event risk. In our view, and similar to yesterday’s PPI outcome we envisage that upside risks remain for the headline index, largely due to increases in energy prices, but expect the core measure to remain in line with expectations. Nevertheless, with UST trading through key technical levels, today’s data is likely to provide only short-term respite and in consideration of yesterday’s rectracement in UST yields we view 4.90% as the next target level for 10-year yields and a retesting of the highs reached in June 2004. The difference this time being, interest rates are firmly on an upward trajectory and will provide the necessary ammunition for the market to push higher.
Ukrsotsbank Ukraine: Weekly review of financial markets
March 22, 2005
Alfa Bank Fixed Income Market Weekly: Emerging market prices will fall at an accelerating tempo, which will in turn move the spread on Russia-30 to 210 bpts.
Description
Exchange and money markets The FOREX market will see active speculative games on the dollar’s appreciation in anticipation of a change to the Fed’s ‘measured pace’ of interest rate hikes. If these expectations prove unfounded, the rate of the dollar against the euro will experience a downward correction, causing a corresponding fall in the dollar on the Russian currency market. Eurobond market The Fed meeting will be the chief event of the week. If the Fed rejects its ‘measured pace’ policy for interest rate hikes, active sales will likely emerge across the entire bond spectrum. Emerging market prices will fall at an accelerating tempo, which will in turn move the spread on Russia- 30 to 210 bpts.
B&N Bank Fixed Income Daily: We consider this sell-off to be a good opportunity to buy cheaper Russian Eurobonds
Description
EXTERNAL DEBT MARKET Ahead of today’s US Fed meeting on interest rates, selling has prevailed in emerging markets. Investors expect the rate to be hiked by 25 bp, but the most important matter is Fed’s comments on its future policy, i.e. the speed of future interest rate increases. The yield of the 10Y UST inched up from 4.48% to 4.52% yesterday. Meanwhile, emerging debt markets saw a more considerable decline, which caused the spreads to widen. The Russia-30 gave up 1% to 102.250, while its spread widened to 212 bp. Russian corporate Eurobonds lost 0.5-1%. We consider this sell-off to be a good opportunity to buy cheaper Russian Eurobonds. We believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET The first tier continued depreciating on Monday, while the second tier was mixed. The ruble debt market has been declining in line with the Eurobond and stock markets, which corroborates the absence of its own ideas. Up to now, the markets have been falling on the general threat that investors might begin withdrawing capital from emerging markets. It seems to us that the domestic market of ruble debt is less subject to this threat in the short term. Until a turnaround of the global trend in the forex market, excess ruble liquidity serves as sufficient guarantee of stability in the ruble debt market. We do not preclude some recovery in the market, which may be triggered by the decreasing country spread in the Eurobond market. However, we expect the rate increase trend to prevail in the market in a longer term.
VTB Capital Fixed Income Comment: Across the corporate and banking sector eurobonds, the more liquid and longer duration credits were the worst affected by the move in the sovereign curve
Description
With UST weakening ahead of today’s all-important FOMC meeting, EM debt also suffered yesterday and the Russian EMBI+ index fell 0.47% over the day with the spread widening 4 bps to 201 bps. Indeed, over the past two weeks Russian external debt has lost almost 3% with the Russian EMBI+ spread widening by 21 bps over the same period. Volumes were relatively thin yesterday as most market participants adopt a cautious approach, albeit with a bias towards repositioning on the short side, and trading was largely confined to the more liquid benchmark issues. In Russia, the benchmark RU30 opened at the day’s high of 1023/4 and traded lower to 102.0 before closing at around 1023/8, with this move resulting in the spread over 10-year UST widening from around 203 bps to 215 bps at its widest point. Elsewhere in Russia, few trades actually occurred across the MinFin and ARIES curves and as such prices were marked lower accordingly. Across the corporate and banking sector eurobonds, the more liquid and longer duration credits were the worst affected by the move in the sovereign curve and the Gazprom ’13 and ’34 credits were 1.13% and 1.88% lower in price terms. Russia has opened this morning on a slightly weaker tone with RU30 trading lower from 1023/8 to 1021/4, resulting in the spread over 10-year UST widening from 209 bps to 211 bps and today’s trading patterns in EM will clearly be dominated by events in the US, namely the release of PPI data (GMT13:30) and the FOMC interest rate announcement (GMT19:15). With regards to the PPI release, higher than expected import and gasoline prices suggest that upside risks remain for the headline index and as such the market focus will remain on the core measure, particularly given last month’s 0.8% m-o-m rise. In consideration of the likely impact of the latter event, mixed rhetoric from Fed officials in recent weeks regarding the duration of using the ‘measured’ phrase has intensified the debate regarding the exclusion of such wording. As a result, market uncertainty has increased surrounding the possibility of a modification in the language of this month’s accompanying statement. While in our view key input price factors suggest that inflation risks remain firmly entrenched on the upside and a 25 bps hike is anticipated, we expect the Fed to retain the ‘measured’ approach this month and thus equip itself with more flexibility for the coming months. At the same time, since referring to the bond market as a ‘conundrum’ in mid-February, 10-year UST yields have increased by around 40 bps and EM spreads widened accordingly, and this may have somewhat alleviated initial Fed fears of an overpricing of global bond market valuations.
Raiffeisen Bank Daily Market Monitor: Meanwhile, the Central Bank has increased the share of euros in its twin-currency basket from 10% to 20%
March 21, 2005
Alfa Bank Non-Government Ruble Bond Market Weekly
Description
1. Blue chips. We suppose that RAO UES bonds are currently overbought, offering a YTM of 4.77% p.a. to 0.6-year maturity. This rate assumes 57-bpt discount to ALROSA-19 and 12-bpt discount to Gazprom-2 with comparable durations. 2. Telecoms Dalsvyaz seems to be too expensive offering 11.14% p.a. for 1.5 years versus UTK bonds, yielding 11.5-12.5% p.a. for 1-1.5 years, and Central Telecom-4 giving 12.2% p.a. for 1.5 years. 4. Municipals Novosibirsk issue is trading at 10.6% p.a. for 1.6 years, which is substantially lower compared to shorter bonds of NovosibirskObl – 11.2% p.a. for 1.3 years. 5. Secondary Market As corporate ruble bond market is now mirroring foreign debt dynamics, we think that Fed decision on a key rate tomorrow will be the price driver this week. Given continuing sales of Russian Eurobonds following Fed’s announcements, we recommend to decrease the duration of ruble bond portfolio and increase the share of 2nd tier issues with attractive coupon rates. Investment Summary
B&N Bank Fixed Income Daily: The market is very quiet to start this Easter shortened week. Unfortunately we expect this quiet period to contiue for this and next week.
Description
EXTERNAL DEBT MARKET Russian Eurobonds remained unchanged on Friday against the background of some yield increases in US Treasuries. Investors are unwilling to increase their market activity ahead of the US Fed’s decision on its interest rates to be made tomorrow. No one doubts that the Fed will raise its key interest rate by another 25 bp to 2.75%, but, as always, the main issue is what the FOMC is going to say in its comment concerning the economy and future interest rate policy. Most likely, the Fed will again mention steady economic growth in the US and announce further measured interest rate increases for the sake of inflation control. The Russia-30 has depreciated to 102.500 and is traded at a spread of 205 bp, following the yield increase of the 10Y UST from 4.48% to 4.52% today. It is worth noting that Russian corporate and bank Eurobonds saw healthy demand on Friday, having added ј-3/4%. The markets are likely to remain inactive until the Fed decision is published tomorrow. We consider this sell-off to be a good opportunity to buy cheaper Russian Eurobonds. We believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET Trading was rather dull on Friday, with most first-tier issues mixed within +/- 0.1-0.2% on average turnover. The long OFZ yield curve remained practically unchanged for the day at 7.53-8.73%. Selective deals were observed in the Moscow municipal sector, with the leader in turnover being the Moscow-28, most probably, continued to be bought back from the market by the Moscow municipality. Non-aggressive selling prevailed at the long end of the corporate first-tier yield curve, while equally non-aggressive buying dominated at the short and medium parts of the curve. The second and third tiers were mixed, with approximately equal number of buyers and sellers. Today and tomorrow, the participants of the forex and Eurobond markets will be waiting for tomorrow’s FOMC decision, which should exert certain negative pressure upon the local market, too. This morning, the euro has eased to 1.32 EUR/USD, making the ruble depreciate to 27.52 RUB/USD. Against this background, the yield of the 10Y UST has reached 4.52%, and the Russia- 30 has fallen below 103% again, with its spread widened to 207 bp. An additional negative factor for the ruble debt market will be more supply of second- and third-tier papers, which may cause some yield increases in the secondary market.
Raiffeisen Bank Daily Market Monitor: The market’s attention remains fixed on the U.S. FOMC rate decision due Tuesday
Description
Rich rouble liquidity was enough to counterbalance negative sentiment on Friday’s rouble bond market after a slight fall in the rouble against the dollar and a sell-off by some large players hurt prices on Moscow City bonds. We see a similar scenario for Monday, although potential rouble appreciation could provide an additional boost to the market. The Russian Eurobond market saw little change on Friday despite a slight jump in benchmark yields as the UST’10 yield widened 4 bps to 4.51%. The market’s attention remains fixed on the U.S. FOMC rate decision due Tuesday (another 25bps increase to 2.75% is broadly expected for the key rate). The wording of the comment accompanying the decision will also be watched as it could provide some insight into the Federal Reserve’s assessment of U.S. economic development and thus future interest rate dynamics. February PPI inflation, to be released the same day, could also influence the market. No significant economic releases are due Monday.
March 18, 2005
B&N Bank Fixed Income Daily: Markets have stabilized - still think Russian Sovereign spread is a buy at 200
Description
EXTERNAL DEBT MARKET The sell-off of the last few days in emerging debt markets seems to have already taken the strain off, and many of those who wanted to sell bonds have already done this. As a result, the Russian Eurobond market saw steady purchases yesterday. The Russia-30 appreciated to 103.250 by the end of the day. Corporate Eurobonds also began rising. All emerging market instruments saw demand, bonds as well as stocks. Meanwhile, the yields of US Treasuries stabilized. The yield of the 10Y UST has been fluctuating around 4.47-4.50% over the last few days. Today, the Russia-30 inched up to 103.375, while is spread narrowed to 200-201 bp. We consider this sell-off to be a good opportunity to buy cheaper Russian Eurobonds. We believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET Selling practically stopped yesterday against the background of stabilization in the Eurobond market. Most first-tier issues were mixed within +/-0.1-0.2%. In the government bond sector, the yield curve of long issues was marked up 1-3 bp to 7.53-8.74% on minimal turnover. The leaders among Moscow municipals were the medium-dated Moscow-31 and -40, with their yields practically unchanged. Other issues’ turnovers were minimal. Among corporate blue chips, short-maturity issues (the Alrosa, the VTB-3, the Gazprom-2) were recovering faster than the others, up 0.3-0.7%. However, sellers still prevail at the long end of the yield curve, with the Russian Railways outperforming the market. In the second tier, telecom bonds that had been the outsiders on Wednesday somewhat recovered. Other issues were mixed. Today, Russian Eurobonds have been strong enough (the Russia-30 is trading at 103.25-103.375), while the euro remains in a correction following its recent growth, and the ruble debt market has good chances to strengthen ahead of the weekend. We would like to draw investors’ attention once again to AIZhK bonds, which are our favorites in the second tier (see the trading ideas). Starting next week, the Central Bank will begin crediting commercial banks on the security of AIZhK bonds, which should remove the last barrier (the liquidity risk) to the further narrowing of the AIZhK bonds spread over the yield curve of Moscow municipals and OFZs.
Raiffeisen Bank Daily Market Monitor: The Russian Eurobond market demonstrated some signs of positive dynamics on Thursday after a prolonged correction
Description
The correction on the rouble bond market came to an end on Thursday with support coming from significant rouble liquidity, the end of a slide on the Russian Eurobond market and bond yields above the local minimum. Potential rouble strengthening in the coming week could well induce another price increase, although it would likely be short-term as there is still little room for yields to decline. The Russian Eurobond market demonstrated some signs of positive dynamics on Thursday after a prolonged correction. Despite U.S. economic figures on the day merely confirming expectations, benchmark yields saw a slight decline. The UST’10 yield fell by 5bps to hit 4.47%, allowing the Russia’30 bond price to climb above 103%. The next portion of U.S. economic figures should set the tone for benchmarks on Friday: The February import price index is due (0.6% m-o-m expected), as are figures for the preliminary University of Michigan confidence index (94.9 is the consensuses). However, too much uncertainty remains on the benchmark side. The most important news in terms of insight into future market development should be the FOMC decision on a key U.S. rate on Mar 22 (a 25 bp increase to 2.75% level is broadly expected).
VTB Capital Fixed Income Comment: Despite early morning EM risk aversion selling pressures, a late UST led rally pushed Russian eurobonds higher yesterday
Description
Despite early morning EM risk aversion selling pressures, a late UST led rally pushed Russian eurobonds higher yesterday and the Russian EMBI+ index posted gains of around 0.42% with the spread tightening 2 bps to 197 bps. At the same time, Russia’s recent performance has proved somewhat resilient in comparison to other EM credits and the spread over Mexico’s sovereign credit curve compressed further to 26 bps yesterday, its tightest level since October 2003. Amid reasonable volumes the benchmark EM issues were actively traded within sizeable ranges. In Russia, the benchmark RU30 opened at 1025/8 and moved lower to 1017/16 before recovering in late session to retest the 1035/8 level in New York and closed slightly off the highs. A move that resulted in the RU30 spread over 10-year UST widening from 211 bps to 213 bps and subsequently tightening into 204 bps at the day’s high. Across the curve, activity also improved and most credits were traded with the higher yielding RU28 also posting notable gains (+47 bps over RU30). Similarly, the ARIES curve was also active with evident demand for most credits. In contrast, both corporate and banking sector bonds witnessed a slight shift in sentiment and most credits were lower bid. Despite local selling pressures, London market participants are currently providing support for Russian debt this morning and the benchmark RU30 has traded in a 1033/16-3/8 range (+204 bps to +201 bps over UST). While over the near term we anticipate this momentum to carry and expect a retesting of the +200 level, the market still retains a nervous tone ahead of the forthcoming batch of US price data. That is, the market will watch closely for today’s release of import price index for any insight into next week’s all-important PPI and CPI data releases.
March 17, 2005
B&N Bank Fixed Income Daily: Probably, the last 10 days’ selling volume in the market has been absorbed, and stabilization is likely to ensue
Description
EXTERNAL DEBT MARKET The first half of the day was rather nervous in emerging debt markets yesterday. The global and local bond markets saw panic selling along with stock markets. Investors were closing out longs against the background of fears of further more significant interest rate increases in the USA, and less investor tolerance of high-risk assets. The Russia-30 hit a new YTD low of 101.8125 in early Moscow trading yesterday, while its spread widened to 215 bp. At the level of 101.875- 102.125, panic selling was noted, which, however, turned to be the last downward tug at the moment, after which the market rallied quite considerably, with the Russia-30 up to 103.125 by the market close in London and its spread narrower to 205 bp. By the New York close, the Russia-30 stabilized around 102.875. The market has remained at the same price levels this morning in Moscow. Probably, the last 10 days’ selling volume in the market has been absorbed, and stabilization is likely to ensue.. We consider this sell-off to be a good opportunity to buy cheaper Russian Eurobonds. We believe that the spread of the Russia-30 should return below 200 bp quite soon, and should narrow to 150 bp in the future. Excellent fundamental and debt parameters of the country should outweigh all risks, and investors should renew their active purchases of Russian Eurobonds soon. We do not change our target price of the Russia-30 as of the year end, which is about 105.125, and its spread about 150 bp. Therefore, we recommend buying the Russia-30 at the current levels. LOCAL DEBT MARKET Profit taking continued in the first tier yesterday, with most issues down 0.3- 0.9%. The second tier was mixed, while telecoms performed worse than the broad market. Investors’ reaction to negative news concerning SMARTS bonds was restrained: the bonds’ spreads widened but no mass selling ensued. The main negative factor for the ruble debt market remains the ongoing sell-off in the Eurobond market, where Russia still remains an outsider. However, a considerably wider Russia’s Sovereign spread along with general stabilization in emerging debt markets allows us to hope that the main selling has already taken place. At the same time, the ruble debt market lacks its own ideas and therefore has good chances to rise. The main events in the market yesterday were the placement auction of the long benchmark OFZ 46018 (duration about 8.5 years) and buyback auctions of three short-maturity Moscow municipal bonds. The auctions were equally unsuccessful for both issuers. Despite deterioration of market conditions and minimal investor demand, the MoF still managed to place the necessary 20% of the new issue. The MoF decided to sacrifice an additional 10 bp of yield (the yield at the average weighted price equaled 8.69%) and solve its main task of bringing the new benchmark in the market. However, from now on investors are likely to be tempted to bid too aggressively at future benchmark auctions (the yield at the minimal price yesterday was 8.85% compared to 8.69% at the weighted average price), as there will always be a chance that exactly their volume will be needed for the auction to be declared as having taken place. The city of Moscow managed to buy back from the market only RUB 611 mn worth of its bonds, which can hardly be named a success. We estimate the remaining free float of the Moscow-24 and -34 (taking into account the earlier buyback operations in the secondary market) at 63%, and the Moscow-28 at 33%.
VTB Capital Fixed Income Comment: With UST firmer this morning Russia’s external debt has also traded higher
Description
Ongoing risk aversion towards EM debt led to early morning selling pressures across most benchmark EM credits and spreads widened further with Russia’s EMBI+ spread increasing 5 bps to 199 bps, its widest level since the beginning of February. Volumes were above average with activity largely confined to Russia’s benchmark RU30, which traded from an opening level of 1023/8 through the 102 floor to touch 1017/8, and with the yield increasing to 6.676%, this move led to the RU30 spread over 10-year UST widening markedly to 214 bps. Nevertheless, fears of any outright collapse in the market were soon dismissed following a late spike in UST and subsequently a bout of short-covering led buying prevailed and Russia’s benchmark bond recovered from its early losses to close at 1023/4 in New York with the spread tightening to 205 bps. Across the curve, RU28 was also relatively active in both swap and outright position taking and the spread over RU30 held firm in its recent range, trading from 47 bps to 49 bps. Although few trades occurred across the ARIES curve we anticipate activity to increase today following yesterday’s late comments by President Putin’s aide, Igor Shuvalov, that Russia will continue to seek a discount from Paris Club creditors regarding the country’s proposed early debt repayment and dismissed the notion of accepting a nominal exchange. While such comments are likely to result in headline selling pressures, we view this as the latest round of ‘horse trading’ between the two parties and as previously mentioned while we expect these discussions to remain protracted the likelihood of any further ARIES II issuance remains remote. That is, the fiscal funding needs of Russia’s largest Paris Club creditors, namely Germany, France and Italy, signal that Russia’s cash offer will remain too tempting to resist. With UST firmer this morning Russia’s external debt has also traded higher with the benchmark RU30 currently trading in a 1025/8-10215/16 range (+207 bps midprice over UST) and we expect EM debt to track UST ahead of today’s economic data releases, including jobless claims, Philly Fed and leading indicators. Still, it remains too premature to call an end to this current cycle, particularly ahead of next week’s all important FOMC, PPI and CPI data releases and as such both EM and Russia will remain vulnerable over the near term to any further technical moves in UST and risk aversion selling. That said, any further retracement in both RU30 and the more liquid corporate credit spreads to levels witnessed yesterday and beyond, is seen to offer value and pockets of ‘value buying’ are expected.
Raiffeisen Bank Daily Market Monitor: Russian Eurobonds saw little change on the day as they continued to track benchmark dynamics. We believe that the same pattern will remain in the coming days
Description
Wednesday saw another day of correction on the rouble bond market, with prices declining on moderate turnover. However, we expect the declines to end soon. Firstly, healthy rouble liquidity remains a supportive factor. Secondly, exchange rate dynamics have reversed to see the rouble strengthen again. At the same time, these positive factors are balanced by significant uncertainty in the mid-term. Meanwhile, the Ministry of Finance placed OFZ 46018 on Wednesday. The bonds, maturing in 2021 with an amortization structure, were placed at an average yield of 8.69 at the auction. But the ministry did not allow enough of a premium to place the whole issue – only Rub 2 bln of Rub 10 bln were placed. We believe that sovereign bond placements just to meet budget targets could hurt the market through benchmark yield increases. However, we see the risk of such an outcome as insignificant at present. Russian Eurobonds saw little change on the day as they continued to track benchmark dynamics. We believe that the same pattern will remain in the coming days. However, a sovereign spread increase to 196 bps could make Russian bonds more attractive, should positive sentiment find its way into the UST segment. As for Thursday, the major news on the benchmark side are U.S. jobless statistics (314k initial jobless claims are expected) and leading indicators (0.1% being the consensus).
Ukrsotsbank Ukraine: Weekly review of financial markets
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