CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RO Bonds: Yesterday, the MinFin raised RON 200mn in T-bonds, with residual maturity of slightly more than nine years. Despite high interest in the auction, corresponding to a whopping 6.6 bid-to-cover, the average yield was only marginally lower compared to a previous market tap in March (5.26% vs. 5.30%). For the time being, we see five-year T-bond yields at 4.8% in December 2014, but the upside risks remain in place, mainly due to developments in the Ukraine, the election year in Romania and the further rollback of monetary stimulus by the Fed.

HU Politics: PM Orban held an international press conference yesterday, at which no major announcement was made. Orban told that the new (old) government does not have an FX rate target. He also added that, based on 2013 results, banks could already incorporate the banking tax into their operations. The latter suggests that the levy should remain in place in some form in the upcoming years, which is not a surprise. It still remains an open question as to what extent the government changes its tone towards markets compared to the previous four years. A more predictable economic policy could help stimulate stalling private investments and spur economic growth in a sustainable manner. Nonetheless, we also think that the cabinet will continue to keep the budget deficit under control. We see 10Y yields edging up to 6.00% by this year-end.

CZ Macro: Industrial production increased by 6.7% y/y in February, largely due to 16.1% y/y growth in the manufacture of motor vehicles (adding 2.8pp to the overall y/y industrial production increase). As industrial activity remained considerably subdued in 1H13 because of the lingering recession, the low base effect and ongoing sharp increase in non-domestic new orders (23% y/y in February) should guarantee that industrial production will continue its solid expansion for at least the remainder of 1H14. Although the trade balance surplus remained unexpectedly weak in February (CZK 13.6bn, largely due to the increase in imports of oil and natural gas), we see net exports of industrial production as one of the main drivers pulling the EURCZK (currently 27.45) closer (27.10) to the CNB floor of 27 by the end of 2014.

Traders’ Comments:

CEE Fixed Income: On the back of renewed escalating tensions in eastern Ukraine we saw a relatively quiet start of the week in CEE and Corporate bonds. The biggest underperformers were Hungarian local currency long end of the curve bonds which rose in yield between 11 bps and 9 bps while Romanian local currency bonds outperformed across the curve. Romania’s central bank commented yesterday that foreign exchange reserves are excessively high while keeping the 12% reserves requirement for RON liabilities and 18% for foreign currency. In addition, the strong auction results in Romania further supported local market and resulted in higher local bond prices. In Corporates, the performance was rather unchanged with the major news that SID Bank announced a tender and Exchange offer for Sedabi 15. Flow wise, we traded RURAIL17, PKOBP 15, BREW 19 and SEDABI 15. In auctions, today Austria will sell 1.1 Bn of RAGB 1.75 23 and RAGB 3.15 2044.