CEE Macroeconomic and Fixed Income Research

Analysts’ View:

RO Bonds: Strong demand for the reopening of a T-bond issue maturing in June 2021 (~3x) helped the MinFin to raise the planned RON 300 mn at an average yield of 2.60%. Yesterday, the country’s debt managers stated that Romania would soon tap the international market by issuing Eurobonds worth EUR 2 bn as they look to benefit from ample liquidity on global markets. Romania needs to repay EUR 1 bn in March, so the announcement did not surprise the market. A separate release on Friday morning will reveal details of the GDP growth structure for the last quarter of 2014. The latest macro data reinforces our belief that household consumption was the key driver of economic growth in 4Q14, while investments may have been less of a drag, or might even have showed a small increase. We see the 5-year ROMGB bond yield at 2.3% throughout 2015, but the substantial ECB stimulus as of September 2016 could push yields even lower if the geopolitical backdrop remains calm.

HU Fiscal: The budget deficit was HUF 256.9 bn in February, which is substantially lower than last year (HUF 407.9 bn). The year-to-date cash-flow based deficit stood at HUF 310.7 bn in February reaching about 47% of the deficit target. The relatively high YTD deficit in February is not unusual as the Hungarian budget deficit is usually front-loaded. According to the Economy Ministry, higher tax revenues and lower debt service costs contributed to the better figure this year. Thanks to the introduction of online cash registers connected to the Tax Authority, VAT revenue has been increasing significantly. Local municipalities’ debt consolidation increased the deficit last year which distorts the base for comparison. The budget deficit target is 2.4% of GDP this year, and in our opinion, the government’s commitment to remain below the target is credible. The contained budget deficit is yet another reason why we expect bond yields to decline further (we see 10Y yields at 2.1% by the end of 1H15).

Traders’ Comments:

CEE Fixed income: The ECB meeting came and went, leaving markets in CEE largely indifferent to what was announced. The process of QE remains opaque and the individual central banks in the Eurozone will exercise a large degree of discretion over what bonds they purchase. The clearest take-away was Mario Draghis statement that the ECB would not purchase bonds at a yield lower than the negative deposit rate which currently stands at – 0.2%. Probably more significant for investors was the upbeat tone of the press conference and the ECBs forecast of a pick-up in GDP growth. Listening to Mario Draghi one could be forgiven for thinking that QE is unwarranted because, according to their own forecasts, they are on track to hit their target of inflation close to 2% by 2017. Ignoring China’s downwardly revised GDP growth target, yields could now come under increasing upward pressure if today’s US Non-Farm Payrolls show solid growth, especially if wage dynamics get stronger. In any case, Polish markets have now priced out any more rate cuts from the NBP and yields on POLGBs rose on the day as the curve bear steepened. Expect that trend to continue if you buy into central bank optimism. Undeterred by this, Montenegro has announced it will soon issue a new Eurobond which will likely meet with strong demand. The recently issued CROATI 3 25 traded up to 98.15% from the reoffer price of 97.845% in the aftermath of the ECB press conference in an indication that fixed income investors are either not quite so convinced about future growth prospects or are just flush with liquidity. One thing is clear though. The CZK is once again under upward pressure just as the TRY is getting hammered. This is the typical safe-haven trade in our region which will likely get even more accentuated if the trend in EURUSD continues.