CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

CZ Bonds: According to Czech Finance Minister Andrej Babis, due to the improvement achieved in liquidity management, the country's public debt, which reached CZK 1.79 bn in 2013, will stay the same in 2014 and 2015. Such a scenario implies a drop of public debt as a percentage of GDP to 43% in 2015 (compared to 46% in 2013). Similarly, regarding the recent cashpooling efforts, as well as the faster than expected economic recovery, the central government deficit is expected to come in at CZK 100 bn in 2014, instead of the CZK 112 bn initially estimated. As a result, MoF issuance activity will be limited for the remainder of 2014 (CZK 30 bn worth of government bonds, according to our estimates), as Babis also reiterated that he sees no need to issue any euro denominated bonds this year (in spite of the EUR 3 bn worth of T-bonds maturing this year). Hence, we expect the yield on the 10Y T-bond to increase only moderately to 1.67% at the end of 2014.

PL Rates: The communication from the central bank has intensified. Chojna- Duch presents a dovish stance and suggests at least a 25 bp cut. Zielinska- Glebocka supports the stability of the policy rate, while Bratkowski (so far recognized as dovish) thinks that the next move is likely to be a hike above 50%. He argues that only slowing growth in 2Q14, accompanied by a low inflation rate, could be an argument for a cut, but the MPC would need time to evaluate the situation. In our view, such a scenario (lower growth in 2H14 and deflation) should materialize in the coming quarters and eventually convince the MPC members to ease monetary conditions. Such a development would support a weaker zloty and low yields, which we currently see 4.11 (EURPLN) and at 3.4% (10Y), respectively, at the end of 3Q14.

Traders’ Comments:

CEE Fixed Income: Austria issued an additional EUR 550 m in RAGB 1.65% 2024 bonds at a yield of 1.497% and another EUR 450 m in the RAGB 3.15% 2044 at a yield of 2.355% yesterday. Investors bid for EUR 1.318 bn in the first and EUR 1.301 bn in the latter, taking the yield spread on the 2044 versus the respective German benchmark bond to 16 bps (down from 40 bps a year ago). The Austrian governing coalition approved a law on the same day that imposes losses on holders of state-guaranteed debt owed by Hypo Alpe Adria Bank International AG. EUR 890 m of subordinated debt was made void along with a further EUR 800 m of loans from BayernLB. This unprecedented move by Austrian lawmakers would typically lead one to expect a blow to investor confidence but the unwavering rally in RAGBs looks like a glaring example of investor confidence in a continuation of the “low rates forever” scenario with barely a blip in the downward trend in yields.