CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HR Bonds: Croatia yesterday successfully tapped the market with a 10y EUR 1.5 bn international bond priced at a yield of 3.25% (mid-swap + 255 bps). Robust investor demand (book size was in the region of around EUR 6.5 bn) allowed for the hefty issue size (we were expecting EUR 1.25 bn) and more favourable pricing (the initial pricing guidance was set at ms+ 287.5 bps). The MoF made good use of the favourable market environment, securing record cheap funding and substantially decreasing financing risks for the remainder of 2015, as the focus now shifts to local demand (this is likely to be the sole Eurobond this year, unless some pre-financing is done ahead of the upcoming election period), where we see very limited risks of negative surprises. The country’s comfortable financing profile and ECB QE continue to support additional yield compression in Croatia going forwards and, hence, we now expect 7y benchmark HRK yields to dip below 3% over the course of 2015. The still shaky fiscal and economic fundamentals point, however, to ongoing underperformance vs. regional peers.

PL Rates: A bigger than expected cut of 50 bps ends the easing cycle in Poland and leaves the policy rate at a historically low level of 1.5%, according to NBP Governor Belka. As expected, the inflation path was visibly revised downward (deflation is expected this year). We tend to think that this was the factor that eventually convinced a majority to support a 50 bp cut. However, inflation seems to be bottoming out and leading indicators such as PMI suggest that economic growth should again start to accelerate. If such a scenario materializes, the MPC will not ease monetary conditions further – especially as its term of office is slowly coming to an end. Today’s decision should stem the recent appreciating trend of the zloty at least for a while (our forecast: EURPLN at 4.18 at the end of 1Q15). Our baseline currently assumes a flat policy rate for 2015-16 and we will be revising our market forecasts accordingly.

HU Macro: Retail sales volume surpassed analyst expectations, rising by 8.2% y/y (adjusted for calendar effects) in January. Expansion in non-food retail trade (11% y/y) and automotive fuel retailing (9.4%) were mainly responsible for the good figure. The last time we saw such high growth was in 2004. Thanks to the rise in real wages and fall in fuel prices, products have become cheaper and this may have been reflected in household purchases. In our opinion, the improvement in private consumption could continue this year, and the contribution to GDP growth may also be higher than last year. There was no market reaction after the figure was released.

Traders’ Comments:

CEE Fixed income: CEE local currency government bond yield curves were in bear steepening mode yesterday. The 50 bp rate cut in Poland, though not entirely unexpected, was at the wider end of analyst’s forecasts. The accompanying statement from the NBP that the rate cutting cycle has now come to an end seems a bit premature given that monetary conditions tightened as a direct result of that assessment (yields are higher and the currency is stronger). The trade of the moment now is apparently long PLN/short HUF given the diverging communication about monetary policy in the two countries but ultimately the performance of bonds and currencies in CEE will more likely be driven by the effects of QE in the Eurozone and rate hikes in the US. The technical bid for fixed income was overtly apparent in the Croatian new issue where investor concerns about economic performance gave way to the wall of cash that needs to be put to work. This bodes well for Romania’s RON 500 m re-tap of the 5y DBN032 today. Outside of the government bond space, specialist distressed buyers were opportunistically picking up Hetar senior bonds which traded from 40 to 60 in a hectic trading session. Speculation is growing that bond holders will cut a deal with Austria that pays them more than they could ever achieve by forcing the company into bankruptcy and triggering guarantees that Corinthia could never afford to honour in full. The local press reports this morning are focusing on proposals to fund an SPV that buys back bonds at market prices or a 2:1 debt swap into RAGBs.