CEE Macroeconomic and Fixed Income Research

Analysts’ View:

PL Rates & Bonds: Yesterday, Poland sold PLN 6.95bn in 2Y and 5Y papers on total demand of PLN 9.77bn and an extra PLN 702mn in top-up auction. The auction priced 2Y papers to yield 1.645% and 5Y papers to yield 2.083%. The sold amount was close to the upper range of the planned amount and the Ministry of Finance should be able to complete this year's borrowing needs by fall. The MPC minutes did not bring much information apart from expressing the concern that excessive strength of the zloty could hurt economic growth in Poland. Such a comment is in line with our thinking that, if the EURPLN moves toward 3.8-3.9, at least a verbal intervention is a likely scenario. Nevertheless, if the zloty stays where it is now (4.0 vs. the EUR, i.e. close to its fair value and our quarter-end forecast of 4.02 vs. the EUR), the MPC will reaffirm that it feels comfortable with such levels and that no action is needed.

PL Macro: Unemployment is expected to drop further to 11.7% in March, reflecting the positive trends on the labor market. Such a development translates into growing consumer confidence and supports a higher level of spending. That should be seen further in dynamic growth of GDP in 1Q15; in particular, growth of private consumption will be additionally fueled by the low price of oil. The improving economic outlook supports the strong zloty (4.02 vs. the EUR at the end of 1H15).

HU Bonds: This week’s auctions went rather well - no hiccups occurred. Demand for both 3M and 12M HTBs was strong, as the amount of bids was double the offered amount. Average yields decreased to 1.51% (by 3bp) and 1.55% (by 4bp), respectively, indicating that markets may have started to realize that the key rate might be cut below 1.5%, and the low rate may be kept intact longer than previously expected. Demand for the floating-rate note linked to the 3M Bubor was again disappointing. The AKK thus issued less than the planned amount. We think that the MPC may reduce the base rate (currently at 1.8%) by 30bp in two steps by the end of June. Risks are tilted downwards, as the probability of the MPC continuing the cycle in July has been increasing. Our forecast projects that the 10-year tenor may follow the rate cuts, however, to a lesser extent, as it may drop to 3.1% by end-2Q15.

RO Macro: After Romania failed to reach an agreement with the IMF/EU in February, by delaying the liberalization of the natural gas market, the local authorities have recently announced that the final natural gas prices for households will go up 5-8% from July. We think that this hike will be partially offset by the upcoming VAT reduction for all food items (9%, from 24%). In a separate event, the MinFin sold the planned RON 400mn at a T-bond auction with a remaining maturity of 4.2 years. Decent demand from investors (2.5x higher than the allocation) led to a marginal fall in yield (2bp, to 2.33%). We estimate that 5-year ROMGB yields will hover near 2.3% by December 2015.

Traders’ Comments:

CEE Fixed income: Greek bonds continued to perform yesterday despite the expectation of no deal today. In CEE corporate universe we experienced rather a slow day with little turnover and stable price level.