CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: The central bank decided to keep the policy rate unchanged at a level of 2.1% at its meeting yesterday, in-line with market expectations. The policy rate was kept on hold for the third consecutive month. After the September inflation reading, which came in at -0.5% y/y (considerably lower than expected) and the larger than expected rate cut in Poland, some speculation rose that the MNB may follow suit. Nonetheless, we think that the strategy of the central bank is to keep the policy rate unchanged for as long as possible rather than having to increase it sooner from a lower level. We think that the MNB will refrain from increasing the rate in 2015. At yesterday’s 3M Tbill auctions, the average yield was set at 1.74%, significantly (40 bps) higher than last week. We keep our exchange rate forecasts unchanged and see the EURHUF at 307 at the end of this year and around 310-311 next year.

Traders’ Comments

CEE Fixed Income: ROMGBs surged ahead once again yesterday with yields falling around 12 to 7 bps across the curve amid strong demand for shorter duration bonds causing a bullish steepening of the curve. The bid to cover ratio for the DBN040 (Jan.2018) at yesterdays auction was a massive 5.8x and the MoF sold all RON 500 mn on offer at a yield of 2.57% on average (8 bps below market expectations) with a maximum yield bid of 2.60%. Slovenia also took advantage of the current excess liquidity in fixed income markets and successfully issued a EUR 1 bn 7y Eurobond at ms+ 160 bps. The final book was rumoured to have been more than EUR 3.2 bn. With equities up in major markets and an increasing number of pundits expecting the FOMC meeting to be largely a non-event, CEE fixed income had another good day in general. The low yielding CZK weakened whilst the higher yielding PLN and HUF posted gains which are another indication of a shift back to the carry trade. The POLGB curve bull flattened while longer dated HGBs shrugged off the rise in yields in shorter durations following the MNB decision not to cut rates further.