21 April 2008 Kapital View - Fixed Income Market Outlook Calendar Date Time Country Event Period Consensus Prior Eurobond Market 22 Apr 18:00 USA Advance Retail Sales Mar 4.9 mn 5.03 mn Conditions on the domestic debt market are favorable, 18:00 USA Retail Sales Less Autos Mar -2.4% 2.9% mainly due to abundance of ruble liquidity. Some worsening is likely in the short term, but we do not expect any major 18:00 USA Business Inventories MoM Apr 2% 6% price fall. 24 Apr 12:00 Germany Zew Survey (Current Situation) Apr 104.3 104.8 12:00 Germany ZEW Survey (Econ. Sentiment) Apr 111 111.5 Ruble Bond Market Conditions on the domestic debt market are favorable, 12:00 Germany Empire Manufacturing Apr 98 98.4 mainly due to abundance of ruble liquidity. Some worsening 16:30 USA PPI Ex Food & Energy MoM Weekly 2,985K 2,984K is likely in the short term, but we do not expect any major 16:30 USA PPI Ex Food & Energy YoY Mar 0% -1.1% price fall. 16:30 USA Producer Price Index YoY Mar 0.2% -2.4% FX Market 16:30 USA Producer Price Index MoM Weekly 375K 372K The euro was mixed against the dollar on the last trading 18:00 USA Net Long-term TIC Flows Mar 580K 590K day of the week. 18:00 USA Total Net TIC Flows Mar -1.6% -1.8% Corporate News 25 Apr 12:00 EZ NAHB Housing Market Index Mar 10.6% 11.3% • Amurmetal placed its third bond issue. 18:00 USA Building Permits May 63.3 63.2 See Inside 29 Apr 18:00 USA Consumer Price Index MoM Apr 62 64.5 • Soup du Jour: Monday - US Markets. 30 Apr 00:00 Japan Consumer Price Index YoY 0.5% 0.5% • Primary debt market. 16:15 USA CPI Ex Food & Energy MoM Apr -55K 8K Market at a Glance… 16:30 USA CPI Ex Food & Energy YoY 4Q07 2.4% 2.5% OFZ & Russia–30 Value Change 7.0 135 CBR USD/RUR Exchange Rate 23.3696 -0.0007 6.9 OFZ 46017 Yield, % p.a. 120 CBR EUR/RUR Exchange Rate 37.2348 0.0012 6.8 Spread to Russia-30, rhs EUR/USD 1.5739 -0.0171 105 6.7 Overnight, % 3.09 -0.380 90 6.6 Balances with CBR, Rb bn 749.4 -26.30 75 6.5 Weighted average OBR-OFZ yield, % 6.74 0.012 60 6.4 RUX-Cbonds, weighted average yield, % 8.68 -0.030 45 6.3 Balance of CBR transactions, Rb bn 142.50 6.2 30 REPO transactions with CBR, Rb bn 6.86 6.1 15 REPO weighted average rate, % 6.27 6.0 0 Value Change, bp 20 Aug 20 Sep 20 Oct 20 Nov 20 Dec 20 Jan 20 Feb 20 Mar UST 2Y, % 2.13 2.7 UST 10Y, % 3.71 -2.1 Bund 2Y, % 3.83 14.7 Spread & Russia–30 Yeild Bund 10Y, % 4.13 5.7 6.3 210 LIBOR 3m, % 2.91 9.00 Russia-30,% Spread, bp, rhs Russia-30, % of par 114.8 -28.0 6.1 190 Brazil-40, % of par 135.4 -16.7 Turkey-30, % of par 152.9 64.0 5.9 170 Venezuela-27, % of par 95.7 -83.2 5.7 150 Spread EMBIG, pts 283.0 -1.0 Source: RTS, MICEX, CBR, Bloomberg, Cbonds 5.5 130 5.3 110 5.1 90 30 Nov 20 Dec 09 Jan 29 Jan 18 Feb 09 Mar 29 Mar 18 Apr Source: MICEX, Bloomberg Kapital Investment Group, Research Department, tel.: 411-55-55 Kapital View - Fixed Income Eurobond Market UST-10, RUS-30 Yield and Spread Conditions on the domestic debt market remain extremely Spread, b.p. YTM, % 250 7.0 favorable. Investors seem unworried by upcoming tax payments and risks of a worsening in ruble liquidity. In any case, availability of numerous refinance opportunities 200 6.0 should prevent major growth of interest rates on money markets even if there is some pressure on liquidity. Rising 150 5.0 equity markets on Friday afternoon boosted optimism on the ruble bond market. 100 4.0 However, bond trading conditions may deteriorate through the week. A well as higher interbank interest rates, our 50 3.0 18 Jun 07 18 Aug 07 18 Oct 07 18 Dec 07 18 Feb 08 18 Apr 08 concerns are related to global factors. Investor sentiment in equity markets has been quite shaky of late, and upcoming US Treasury Yields US 1Q08 GDP data could cause an upset. YTM, % 5.0 Two other negative factors for secondary bond trading are 4/18/2008 4/11/2008 primary placements in excess of Rb 16 bn and possibility of 4/10/2008 interest rate hikes in Russia to address rising inflation. But 4.0 neither factor is likely to result in a sharp fall of the local debt market, which is supported by direct and indirect 3.0 measures of the Central Bank and the Ministry of Finance as well as desire of investors to hold bonds through the 2.0 long May holidays. Duration The euro was mixed against the dollar on the last trading 1.0 day of the week. The European currency gained initially on 123456789101112131415 the back of rising inflation in Germany, but corrected later in response to publication of corporate reports in the US EM Sovereign Eurobond Yields and subsequent surge of global equity markets. As a result, YTM, % 7.0 the dollar also strengthened in local currency trading, from Ukr-13 Rb 23.3875 to Rb 23.5325. The two-currency basket was 6.0 flat at Rb 29.61. Rus-30 Bra-40 5.0 US-10 4.0 3.0 18 Jun 07 18 Aug 07 18 Oct 07 18 Dec 07 18 Feb 08 18 Apr 08 Source: Bloomberg 21 April 2008 2 Kapital View - Fixed Income Weekly Leaders & Laggards However, despite this significant correction, we still see 1-day Bond YTW Price, % upside potential in the euro. Factors in the euro’s favor are change, ppt higher interest rates in Europe, which are likely to persist Leaders or even increase in the short term, as well as superior PSB 9.625% 5/2012 12.73% 90.02 1.478 European macro indicators compared with the US. Bank of Moscow 7.335% 5/2013 7.15% 100.29 1.284 Gazprom 5.364% 10/2014 € 7.26% 90.15 1.09 We do not expect growth of global equity markets, which Alfa Bank 8.635% 2/2017 10.81% 93.20 1.072 helped the dollar rise, to be sustained in a context of Gazprom 6.212% 11/2016 6.79% 95.67 0.975 record write-offs. Consequences of the financial crisis may Bank of Moscow 7.375% 11/2010 5.29% 104.72 0.949 turn out more serious and long-lasting, making increased Gazprom 5.875% 6/2015 € 7.37% 91.83 0.944 optimism unjustified. Equity markets have seen increased TNK-BP 7.5% 7/2016 8.04% 96.20 0.902 volatility lately, and investor sentiment may worsen again Gazprom 5.03% 2/2014 € 7.16% 89.85 0.897 before publication of US 1Q08 GDP. HCF Bank 9.5% 4/2010 10.46% 98.09 0.832 Laggards The upcoming 30 April FOMC meeting puts additional Russia 8.25% 3/2010 3.36% 105.47 -0.323 pressure on the dollar. The previous cut in the Fed funds Vimpelcom 8.25% 5/2016 8.48% 98.19 -0.338 rate was heavy by comparison with the ECB interest rate, Rosbank 10.14% 7/2012 8.69% 104.75 -0.56 and hints of a pause in interest rate reductions is unlikely Aries 7.75% 10/2009 € 4.77% 104.07 -0.569 to make investors resume purchases of the US currency, Moscow 6.45% 10/2011 € 6.20% 100.60 -0.642 Rusag 6.263% 4/2012 3.73% 109.37 -0.718 particularly since such a pause may not be advisable. Russia 7.5% 3/2030 5.34% 114.82 -0.759 Furthermore, inflationary risks are much more of a concern Russia 11% 7/2018 5.28% 144.65 -0.879 in Europe than in the US and may lead the ECB to tighten Russia 12.75% 6/2028 5.92% 179.69 -1.628 its monetary policy. Aries 9.6% 10/2014 4.16% 130.08 -1.8 The outlook for the ruble is also good, due to strong euro performance and also due to possible changes in the Emerging Market Bond Indexes composition or value of the two-currency basket. Inflation Change Value Change, % S pread, bp risks in Russia are high and the CBR is unlikely to restrict Spread itself to monetary measures only. EMBI+ 440.9 -0.15 265 0 Russia EMBI+ 491.7 -0.36 168 4 Argentina EMBI+ 100.2 1.08 545 -12 Brazil EMBI+ 440.9 -0.23 229 -1 Colombia EMBI+ 330.4 -0.40 201 1 E cuador EMBI+ 858.2 0.33 587 -10 Mexico EMBI+ 389.2 -0.19 138 0 Peru EMBI+ 632.4 -0.28 168 0 Turkey EMBI+ 283.4 0.20 295 -5 S.Africa EMBI+ 153.8 0.15 212 -7 Venezuela EMBI+ 538.1 -0.71 598 10 Source: Reuters, Bloomberg 21 April 2008 3 Kapital View - Fixed Income Ruble Bond Market Corporate Bond Weighted Average Yield Conditions on the domestic debt market remain extremely Negotiated Deals, Rb bn favorable.