Buyers seen for Russian bank paper; Ukraine corporates improve; pre-holiday trading light

By Christine Van Dusen

Atlanta, Dec. 24 - Ukraine sovereign bonds finished the week mostly unchanged with only a few quotes seen, illustrating the larger trend of thin volumes and limited moves on the Monday before Christmas.

"On Monday morning the external market mood remained moderately negative," according to a report from UFS Investment Co. "Before Christmas and New Year's, trading activity will be low while market liquidity will decrease. However it will not exclude a moderate market decline due to US politicians' failure to reach a compromise."

Ukrainian corporate bonds were slightly stronger in trading on Monday, said Svitlana Rusakova of Dragon Capital. Metinvest BV, for one, saw some demand, as did Mriya Agro Holding plc.

These developments came as Ukrainian President Viktor Yanukovich named central bank head Serhly Arbuzov as deputy prime minister.

From Russia, buying was noted for long-dated issues from banks, including OJSC VTB Bank, Vnesheconombank (VEB) and OJSC Alfa Bank, UFS said.

"Russian eurobonds showed no single dynamics," the bank said.

VTB's 2018s and 2020s moved up 0.4%, while Alfa Bank's 2021s ticked up 0.3%.

Also from Russia, Lukoil's BBB- rating was confirmed by Fitch Ratings, given that the company's liquidity is sound and well supported.

"The company's eurobonds are traded with the minimal spreads to the sovereign curve and a discount to Gazprom's issues," UFS said. "Therefore, we do not consider these issues investment attractive."

Prices could dip

The major problems that plagued the market for most of 2012 seem to be easing, according to a survey of about 400 global investors conducted by Barclays.

"Investors' fears about the euro zone crisis, threats to US growth and a Chinese economic slowdown have eased over the past quarter," the bank said.

But given that concerns about the United States' fiscal cliff remain, emerging markets bond prices could suffer in the new year.

"This week we do not envisage significant market dynamics, and most eurobonds will stay at the current price levels," UFS said. "Thus, most issues will start the new year at all-time highs, which is worrisome, given the possibility of a negative scenario for the US budget cliff."

Returns won't rival 2012

Emerging markets investors are expected to focus on bonds from Eastern Europe, Asia and Latin America in the new year, given that many sovereigns there have low debt levels, a London-based market source said.

But returns are unlikely to match those seen in 2012, said Michael Gavin, head of global emerging market strategy for Barclays.

"Unless our expectation of slow but persistent economic and financial recuperation is proven wrong, 2012 is likely to be remembered as a high-water mark in one of the great financial booms of modern history," he said.

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