CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HU Bonds: According to the head of the Debt Management Agency (ÁKK), the gross public debt to GDP ratio may drop to 75% by end-2015 (preliminary end-2014 figure at 77.3%), if the EURHUF exchange rate is unchanged (EURHUF 314.89 on December 31, 2014). In his view, decreasing interest expenses due to the subdued yield environment should create room for the government to reduce the tax burden on the economy. According to earlier statements from the Economy Ministry, no foreign currency denominated bond issuance is planned mid-term. Thus, maturing FX-denominated debt is likely to be refinanced in HUF. As long as global liquidity remains ample (and it is expected to, thanks to the ECB’s accommodative measures), Hungary should not face any immediate difficulties refinancing its maturing debt. However, the uncertainties around the debt-to-GDP trajectory are relatively high, as the debt level is still sensitive to EURHUF swings due to the considerable proportion of FX-denominated instruments within the existing debt stock. If gross public debt in proportion of GDP gets close to or even below 76% by end-2015, a credit rating upgrade to investment grade would be imminent in 1Q16. Against this backdrop, we expect 10Y government yields to drop to around 2.1% by end- 1H15.

CZ Bonds: At yesterday's auction, the Czech MoF sold CZK 4.2 bn worth of government bonds due 2025 together with CZK 5.2 bn worth of variable rate notes due 2020. Unsurprisingly, it was mainly the auction of the 2020 paper with floating annual coupon that met with strong demand with a bid-to-cover ratio of 2.4, compared to 1.3 at an auction held in August. In the case of the 10Y T-Bond, the average yield fell to 0.63% from the 1.31% reached in August 2014 (bid-to-cover at 1.77 vs 2.11 at the previous auction). We consider the recent spike in the yield of the Czech 10Y T-bond (currently at close to 0.7%) as fundamentally unjustified and put it down to the fairly low liquidity on the Czech secondary market. We continue to see the yield compressing to 0.39% at the end of 1Q15.

Traders’ Comments:

CEE Fixed income: CEE government bond yield curves displayed a trend of bull flattening across markets irrespective of currency with the notable exception of CZGBs in yesterday’s trading session. Croatia also lagged behind other local currency debt markets but Eurobonds surged following the announcement that the long awaited roadshow that will precede a new Eurobond issue is being planned for next week. FX markets were calm and traded in narrow ranges. Elsewhere, the precipitous drop in the price of HETA bonds continues as speculation abounds that the HypoAlpeAdria bad bank will bail-in senior bondholders as soon as next month and RBI debt also sold off in the wake of local press reports that the Polish regulator will initiate a formal procedure that could block RBIs voting rights in its polish subsidiary. Austrian banks, in general, will also have to contend with higher capital buffer requirements set by the local regulator according to the meeting protocol of the Financial Market Stability Board from the 24th of February. The board sights systemic risks which include size, high exposure to eastern European emerging markets, comparatively low capital levels and ownership structures that limit the ability to recapitalize in crises as reasons for an additional CET1 requirement that could reach up to another 500 bps of new capital. Outside of CEE, Germany raised more than EUR 3 bn at a negative yield of 0.08% in 5y debt. Moreover, bids amounted to EUR 6.5 bn resulting in the highest bid-to-cover ratio since July 2014. Spain priced EUR 7 bn of 15y bonds at ms +100 bps. The orderbook exceeded EUR 20 bn!! This bodes well for fixed income markets in CEE and supports our view that the new Croatian Eurobond will be well received.