Hungarian bonds lost with the weaker currency

Headlines

Currencies: CEE currencies weakened sharply due to a spike in risk aversion
Fixed Income: Hungarian bonds lost with the weaker currency

Currencies

The zloty had a hectic Monday afternoon and weakened considerably alongside all other CE currencies and tumbling equity markets. The EUR/PLN shot higher to the top of the recent range (4.08) and made it past this level with surprising ease, eventually ending the day testing bids in the 4.13-4.15 area. Activity remains weak as well and while some tentative sings for calmer trading appeared last week, it now seems the market is set to remain jittery and will be driven largely by sentiment in equity markets.

The Hungarian forint remained under selling pressure due to mounting concerns that the country’s IMF program could be at risk as the budget deficit might be higher than previously expected. Lower inflation and deeper recession are feared to lead to lower revenues and eventually a higher budget deficit in 2009, which the government could possibly counterbalance with a VAT hike in the coming months. The forint lost another 2% during the day, to 282.00. The overnight session saw it as low as 284.00, suggesting that the weakening could continue until policy makers announce some steps. The IMF and authorities will hold a press conference in the afternoon, which could give us more information about the actual situation and possible measures.

The Czech koruna came under renewed pressure as overall sentiment in Central and Eastern Europe continues to deteriorate. Although pressure is mounting in the whole region, the losses of the koruna were still moderate compared to the zloty, forint or leu. The pair closed the session at 26.70 EUR/CZK. Nevertheless as we do not see much space for improvement in attitude towards risk, we believe in further selling on the Czech FX market in the upcoming sessions. The pair could potentially test 27.00 EUR/CZK.

Fixed income

Also the Hungarian bond market declined with the weaker currency and bid side at shorter maturities of 1-2 year papers get close to the key 10.00% level. The curve has been shifting gradually, but steadily upwards with the sinking currency and a VAT hike could hurt it more as market has not yet priced in such a scenario.

Polish bonds had a massively positive session on Monday as the market ignored the weaker zloty and yields dropped by up to 20 bps across the curve. The 5Y benchmark was down to 4.95%, below 5.0% for the first time since Q1 2007. The 1Y T-bill auction (PLN 505 m) went extremely well with a bid to cover ratio of 8.2 and an average yield of 4.885% (compared to 5.923% at the previous auction in December), which only goes to sow the extent of positive sentiment in the market right now. Bond yields have dropped by up to 70 bps in a month for shorter maturities and asset swap spreads have tightened as well, particularly in the sentiment-driven 5Y segment of the curve. Apart from the potential for some corrective action in the aftermath of the heavy gains (buying opportunity) we see no reason for the bullish run to end for bonds in the medium term. An even steeper curve seems the most likely scenario as the market gears up for more rate cuts.

Yesterday, Czech government bonds continued to firm, nevertheless trading volumes were far below the average. There are no data scheduled for today. Rising risk aversion should according to theory help bonds to gain further, on the other hand tomorrows auction of 8-year floater might push bond prices in the opposite direction.

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