CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: Hungary’s bond auction was quite strong yesterday, the GDMA could sell HUF 65bn of the 3, 5 and 10-year maturity papers in total. Investors gave the highest amount of bids for the 3-year papers with HUF 67.5bn, while the demand for 5 and 10-year bonds were significantly lower. Although average yields were higher than two-weeks ago, they came in lower than the secondary market rates. 10-year papers were sold at an average of 4.65% vs. the 4.73% secondary market rate. Yields went up significantly in the past week, 10-year rate topped at 4.84% this Monday, up from 4.34% last Monday. We keep our expectation that, in spite of heavy monetary expansion of the ECB and lower German bond yield outlook, long-term Hungarian rates may slightly increase this year and in 2015 (4.8% at end-2014 and 5.0% at end- 2015). This is due to both external and internal factors: the Fed will likely start to hike next year, while the expected FX loan conversion can decrease banks‘ appetite for govies and the effect of the CB’s overhaul of its monetary policy toolkit will also be over. Forint liquidity in Hungary’s banking sector will drop substantially after the FX mortgage loans are converted to HUF. This should reduce banks’ (32% owner of HUF bonds) demand for local currency govies.

PL Rates: Although the motions for the rate cut did not have the majority at the recent MPC meeting, the minutes confirm that most of the members believe that the rate adjustment will be needed in the nearest future. First, there is a risk that inflation will remain below the MPC‘s target in the mediumterm. Second, the economic growth may not be that robust (3.6% in 2014) as the latest inflation projection suggested. Moreover, the uncertainty about the economic outlook in Eurozone has increased. All in all, we expect a 25bp cut in October, and a 25bp cut in November, but we see the risk for a larger move (50bp) if the Central Bank’s inflation projection (to be released in November) presents a disappointing outlook for growth and expected inflation. All this means that yields should remain low - 10Y close to 3.0% at the end of the year.

Traders’ Comments

CEE Fixed Income: Scotland voted to remain with the UK with 55% voting in favor of the union. The vote is likely to remove some uncertainty from European financial markets and allow to re-focus back on ECB actions. The TLTRO take up by banks turned up less than disappointing with EUR 83 Bn borrowed vs maximum possible volume of EUR 400 Bn. The results will make Mr Draghi’s job at expanding ECB’s balance sheet much harder. On the back of these developments CEE markets continued to trade relatively stable with slightly weaker trading in Hungarian bonds where the short to mid curve yields widened by 3 bps while the longer end by 7 bps. In CEE EUR bonds the short end of the Croatian curve (CROATI 6 15) was best performer tightening 10 bps in yield.