CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

TR Rates: The CBT cut the policy rate (the one-week repo rate) by 50 bps yesterday, and left the upper boundary (the ON lending rate) of the corridor unchanged. Both steps are in line with expectations. That being said, some profit taking in the short-end of the curve could still be possible. No material impact on the currency is likely as the upper boundary is still high. The CBT also cut the lower boundary of the interest rate corridor (the ON borrowing rate) by 50 bps, which was also in line with expectations. This latter step can be considered as a technical adjustment and therefore should not affect the market. At the moment, we have our forecast at 8.00% for the policy rate, while our currency forecasts also remain unchanged due to the step.

HU Fiscal: Economic Minister Mihaly Varga unexpectedly announced yesterday that the government will carry out a spending freeze of HUF 110 bn (roughly 0.35% of GDP) in order to safely keep the 2.9% of GDP fiscal shortfall target this year. Varga cited the lower than expected inflation, higher spending on the public works schemes and higher needs for co-financing EU projects as major causes of the step. The other cause might be that, due to FX depreciation, it will be enormously difficult to cut the public debt to GDP figure until this year-end vs. last year, even with a deficit figure slightly below 3% of GDP. The move again demonstrates the commitment of the cabinet to stick to fiscal targets when needed, but it also means possible negative spillover effects on economic growth. We currently have our forecast at 4.80% for 10Y yields at this year-end, but we see downside risks to this assumption if Bund yields continue to remain at current, subdued levels.

RO Bonds: Romania managed to raise the planned amount of RON 300 mn in a T-bond issue with a residual maturity of just over one year, based on very strong investor demand (the bid-to-cover ratio was 3.7). The average accepted yield stood at 2.29%. We see the 5-year ROMGB yield at 4.3% in December 2014, as a possible friendly breakup with the IMF and the upcoming presidential election scheduled for early November are the key reasons behind our expectation of higher bond yields.

Traders’ Comments:

CEE Fixed Income: CEE FX was already on the back-foot but news of MH17 being shot down added additional impetus to the risk-off trade. In spite of the increase in geopolitical tensions, Net4Gas , rated BBB (stable) / BBB (positive) by S&P and Fitch, successfully raised EUR 300 m in a 7-year bond at around midswaps + 165 bps and a further EUR 160 m in a 12-year bond at midswaps + 195 bps. The order book was north of EUR 1 bn. Net4Gas is a transmission system operator, providing the transmission of gas, transit of gas, maintenance, dispatching and diagnostics services for gas infrastructure, and high-pressure gas pipelines for international transmission. The company also raised CZK 7 bn in bonds maturing in 6.5 years at midswaps + 150 bps with an order book topping CZK 8.8 bn. In the sovereign bond space, the Republic of Macedonia launched a 7 year Eurobond worth EUR 500 m. The bond is expected to be rated BB- (stable) by S&P and BB+ (stable) by Fitch and was priced at the lower end of guidance at a yield of 4.25%. Demand reached EUR 1.16 bn. In the secondary market, we saw Serbian Eurobonds come under selling pressure once again but also ROMGBs whilst HGBs and POLGBs caught a bid. CEE fixed income is being pushed and pulled between 2 seperate forces at the moment: the drop in bond yields is a global phenomenen and German Bunds are now at historic lows amid a weaknening economic backdrop in the Eurozone but CEE currencies are coming under pressure as a flight to quality sets in. This has the potential to drive yields in CEE up but at the moment, yield spreads are still decreasing as easy monetary policy drives a hunt for yield.