CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Bonds: Demand for sovereign debt at yesterday’s bond auctions again proved high, approaching HUF 150 bn in total for the three maturities on offer. The Debt Management Agency sold HUF 75.5 bn worth of paper, and an additional HUF 19.9 bn was sold in the afternoon at the non-competitive tender. The maximum yields on 3y, 5y and 10y paper were 4.49%, 4.69% and 5.58%, respectively. Compared to the levels at the most recent comparable auctions held two weeks ago, yields declined slightly between 4 and 13 bps with the biggest decline in the 5y segment of the yield curve. The still excessive global liquidity situation and relatively attractive yield levels seem to be supportive, However, we expect the 10y bond yield to climb to 6% by the end of December.

RS Rates: As expected, the NBS remained on hold at yesterday’s rate setting meeting, leaving the key policy rate unchanged at 9.50%. The wording brought the expected tones, highlighting the comfortable inflation outlook and confirming that fading fiscal and FX risks remain the key ingredient for further policy relaxation once the new government is formed. We expect the NBS to further cut only as of the third quarter, under the precondition that the new government fails to deliver substantial reforms. We keep our 116 EUR/RSD call for the remainder of 2014.

HR Fiscal: The government yesterday expectedly approved another HRK 1.3bn (0.4% of GDP) of budget savings in order to reach the 2.3pp of GDP target set by the EC. Similar to the first budget rebalance, the government kept the balance between the revenue and the expenditure side. Gasoline excise duties hike and taxation of telecom services would support slightly more than half of the 0.4% of GDP effort, while subsidy cuts and slashed investments in the road infrastructure would do the trick on the expenditure side. As a result, the government lowered their GDP forecast by two notches and aligned with our zero call for 2014. We continue to see risks skewed to the downside as far as our GDP forecast is concerned. Fiscal risks remain anchored courtesy of EDP, though admittedly, the government faces a credibility challenge when it comes to meeting the targets. We see HRK yields heading upwards towards 5% later in 2H14.

Traders’ Comments:

CEE Fixed Income: Most people we talk to did not expect a major breakthrough with regard to Ukraine at yesterday’s talks in Geneva, so the four-way talks between Ukraine, EU, Russia and the US ending in agreement must be seen as an unquestionable positive surprise. This should be unequivocally good for CEE fixed income but we also sensed a growing feeling of complacency toward geopolitical risk before the talks so the market reaction may be limited, especially in the face of low activity over the Easter holiday. The activity in Croatian Eurobonds yesterday is symptomatic for how markets are behaving in our region at the moment. We saw better buyers in longer duration paper which drove the yield on the Croati24 down 5 bps but the rest of the curve was unmoved as bids are a tad too low to entice sellers. In effect, we see an increasing willingness to bid but a decreasing willingness to sell and the market cannot clear. In Hungary, we also saw the now undeniable technical bid in primary markets. Where there is supply, there is more than sufficient demand (the bid-to-cover ratios for all three offerings were around 2x). Yields on HGBs in the secondary market fell across the curve amid bullish flattening. Polish industrial output disappointed and producer price data was below expectations which should have created a bid for POLGBs but failed to materialise. With the yield spread between HGB 6% 23/A and the POLGB 6% 23 at 125 bps, the bonds are now priced in the 87.5 percentile of the spread distribution of the last 12 months, 34 bps below the average over that time period. The yield on the HGB is now only 49 bps above the low of the last 12 months, 145 bps below the high. In contrast, the POLGB is 106 bps above the low over the same time period, that’s only 74 bps below the high. Interestingly, the spread between the long and short end of the respective markets is almost identical at around 115 bps with virtually no expectations of further rate cuts in either country. Food for thought.