CEE Macroeconomic and Fixed Income Research

Analysts’ View:

RO Bonds: In line with their initial target, the MinFin sold 5-year T-bonds worth RON 400mn, but at a higher yield than the level paid six weeks ago (2.75% vs. 2.36%). Investor demand was good (2.5x), but not yet sufficient to push yields lower. On the secondary market, yields across the curve remained almost unchanged, as investors have adopted a wait-and-see attitude, after the ECB announced that it would step up bond purchases in the following weeks. We continue to see 5-year ROGB sovereign bond yields close to 2.3% throughout 2015.

HU Bonds: Strong demand characterized the bond auction on Tuesday and yesterday. The Government Debt Management Agency sold HUF 40-40bn in three- and twelve-month Treasury bills. Bids from primary dealers were HUF 130bn for three-month T-bills and HUF 135bn for twelve-month T-bills. In line with that, average yields fell to 1.43% (three-month T-bills) and 1.46% (12- month T-bills). In the case of twelve-month T-bills, we saw a historically low average yield yesterday. This is not surprising, as the market has begun to price the base rate cuts in short paper yields. In our base scenario, the central bank may cut the rate to 1.5% by the end of June; however, if the inflation outlook in the middle term does not meet the NBH’s target in the MPC’s view, they may continue the monetary easing in July. Next week, the statement on the rate decision may give more information about the next steps of the MPC. We maintain our forecast for 10-year bonds at 3.6% in 2Q15 and 4.0% in 4Q15.

HU Fiscal: After we took part at a discussion that took place between analysts and the Ministry of National Economy yesterday, we think that underlying revenue and expenditure developments suggest that this year's budget is under control and no slippages are expected. The YTD cash flow based budget deficit amounted to roughly 70% of this year's nominal deficit target which is a very favorable figure compared to previous years. According to the State Secretary responsible for public finances, it is better to be safe than sorry, that is why inflation is projected to average 1.6% in the following year.
The bank tax will be cut again in 2017 without any additional conditions set in law (such as an increase in lending activity). However, other sectoral taxes are likely to remain intact (such as the tax on the telecom sector). Mr Banai also talked about the credit rating agencies, but he did not give clear any indication when an upgrade back to investment grade could come. He hinted, in our interpretation, that an upgrade this year is rather unlikely. Furthermore, regarding the law about publishing public debt data, no public data about budgetary developments and debt will disappear, the usual releases should continue.

CZ Bonds: Hospodarske Noviny reported that the CNB’s board will debate limiting government bond purchases by local banks in case the sovereign‘s financial situation is deteriorating. According to the newspaper, the CNB will assess the financial strength of the state on an annual basis and, if it perceives that the financial strength of the sovereign has deteriorated, it could order banks to offload some of the government paper portfolio or command them to hold more capital against government bond holdings. CNB Board member Jiri Rusnok declined to give its view on the proposal to the newspaper, but confirmed that it is being debated. We think that the very high liquidity in the Czech banking sector and the govenrment’s aim to limit issuance and finance a significant part of debt redemptions by its excessive cash holdings is positive for the Czech government bond market. However, against the backdrop of recent yield increases, we see upside risks to our call for 10Y yields at the end of the year which is currently at 0.42%.