CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS Rates: In line with our expectations, the NBS Executive Board decided to keep the key rate unchanged at 8.50% for the fourth consecutive month at yesterday's meeting. The official wording brought no surprises with depreciation pressures and fiscal uncertainties (still) playing a key role in shaping the NBS stance. In addition, the CPI figure is seen moving back towards the middle of the NBS target band of 4%+/-1.5, supported by the low base and gradual waning of the effects of low food prices. This view is also in line with our expectations as we see the CPI figure landing at around 3.5% at YE. Looking forward, we expect the NBS to closely monitor fiscal developments and we see some space for additional cuts in 1Q15, provided that the government delivers on the fiscal front.

RO Bonds: In line with their initial plan, the MinFin sold RON 300 mn in yesterday’s June 2021 bond issue. The average accepted yield fell to 3.7%, compared to 4.26% at the previous auction of a similar bond held in mid- September. Demand was decent and investors submitted RON 591 mn which corresponded to a bid-to-cover ratio of 1.7. As liquidity has improved somewhat, the central bank decided not to provide additional liquidity through the 1-week repo on Thursday. We see yields going higher as geopolitical tensions continue, while the populist measures accompanying the presidential election could paint a slightly different picture of public finances in late 2014 and early 2015.

PL Macro: September nominal wage growth at 3.4% as well as employment at 0.8% y/y were broadly in line with market expectations, confirming that the labour market is in good condition. However, markets should remain focused on the afternoon release of industrial output growth. We think that there is space for a positive surprise (we anticipate 3.2% y/y growth in September, vs. market expectations of 2.7% y/y) which may further cool expectations for a 50 bp rate cut in November, vindicating the recent correction on the bond market. Nevertheless, we believe that the yield level should remain low, i.e. we forecast a 10Y yield on POLGBs close to 3% toward the end of the year.

HU Bonds: At yesterday’s bond auctions, the Debt Management Agency sold HUF 75 bn of bonds in 3Y, 5Y and 10Y paper, HUF 15 bn more than planned. Investors‘ bid for nearly HUF 142 bn. Yield levels, however, increased 17-27 bps compared to secondary market levels a day earlier, amid the deterioration of global risk sentiment. That said, we see downward risks to our 10Y yield for the year-end (currently envisaged at 4.8%), given the considerable declines in the weeks prior to the current turbulence. By the end of 2014, the 10Y yield should increase more moderately than forecast.

Traders’ Comments

CEE Fixed Income: Solid US economic data put a stop to the technically driven rot in global equity markets yesterday so in terms of fundamentals not a lot has changed. The million dollar question is when will fear revert back to greed but if indeed the Fed is correct and growth in the US is on an upward trend then one would expect yields on USTs to rise. Not long ago, this was seen as the biggest risk to EM markets (the argument goes that the USD would strengthen and higher UST yields would attract capital flows away from historically low yielding EM debt). So anyway you look at it, CEE fixed income markets are vulnerable. We got a taste of that yesterday as nerves finally snapped. It is typical for CEE fixed income to lag given that the local markets are a bit insulated due to the illiquidity that prevails in most CEE countries but ultimately they have to play catch up at some point. Price quotes evaporated for a while in the morning session and were substantially lower in the afternoon when a certain semblance of normality resumed. The catalyst was the poor auction in Spain where the targeted issuance amount of EUR 3.5 bn wasn’t met. With Venezuela on the brink of default as the price of oil drops and Greece not far behind if they attempt to exit the bail-out programme, we’ll have plenty of headline risks. Putin might also chip in at the G-20. In any case, we might get a bit of respite today but the rise in yields in the Eurozone periphery should be watched closely. Europes structural problems have not gone away.