Czech government sells 15-year bond for 6.13%

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Currencies: The zloty boosted by equities rally and comments made by Obama
Fixed Income: Czech government sells 15-year bond for 6.13%

Poland

The Polish zloty gained nearly 3% and broke sharply below the EUR/PLN 4.6 level. The rally was primarily driven by the improvement in sentiment on global equity markets. The entire region got boost after US President Obama said that there was “complete concurrence“ that emerging market economies must be offered more assistance. Furthermore the zloty profited from the central bank comments on FX options. Vice-governor Kozinski said the NBP may intervene in case of further options expiry in order to limit market volatility. We believe the current sentiment to remain positive as the equity futures point to the good start to the session. Beside that, the technical factors now look fairly optimistic. Sharp break below 4.60 EUR/PLN has opened space to get as far as 4.42 EUR/PLN.

Czech Republic

The Czech koruna tracked the gains of the Polish zloty and got to the 27.00 EUR/CZK neighborhoods. Nevertheless the gains that reflected mostly the regional optimism were much smaller compared to the neighboring zloty. This may partly reflect more complications that have risen on the Czech political scene. Some of ODS’s MPs objected yesterday the plan to create a technocratic government supported by ODS, ČSSD, KDU and the Greens. Nearly half of ODS’s MPs are not happy that ČSSD would have control of half of the seats in the 16-member cabinet or that the opposition leader Paroubek would consult his cabinet nominees with the Communists. Current PM Topolánek is seen as giving in too much to Paroubek. Although we believe global and regional sentiment will remain the major driver for the Czech FX market, the koruna may under perform the zloty due to the politics.

The main event on the Czech bond market was an auction of the 15Y government bond benchmark. Thanks to sufficient demand the finance ministry increased the size of the issue from Kč 8bn to Kč 12.2bn. Nevertheless it has to pay very high price for this issuance. The average yield jump to an eight-year high of 6.13%. The FinMin also revealed the new issuance calendar, which shows more issues of the 10Y and 15Y benchmarks in the second quarter. This was interpreted as a negative signal for bonds in the medium and long segment of the yield curve.

Today, the domestic calendar is empty so the market will definitely focus on the ECB meeting this afternoon. The ECB rate decision (a 50 bps rate cut) should be eyed closely by the market and any decision on more non-standard measures could have a positive impact on the European and Czech bond market. The front end of the Czech curve could also be positively affected by eventual strengthening of the koruna.

Hungary

Sentiment changed on the Hungarian forint market and the pair appreciated sharply from 310 to 300 during the day. It seems that market positioning was too pessimistic for the forint and all the bad news has been priced in.

Today’s ECB decision will be in the focus and lower euro rates could lengthen the current strengthening trend. Looking at the overall developments in recent weeks, the EUR/HUF market seems to have switched from weakening mode to stabilization. The negative news items were paired with higher interest rates and high yields kept the attractiveness of the currency broadly unchanged. Absorption of risks by interest rates has worked many times during earlier forint crises and it usually eases the burden on the currency. In this case, we may see range trading continue in the coming weeks and the forint crisis could come slowly to an end after 6-months.

The Hungarian bond market had a U-turn with the currency and yields correcting back all of the losses on Wednesday. Yields lowered by about 30-50bps and the 5- year yield came down to 12.5% from 13%, while the 10-year yield is back to below 12%.

Absolute yield levels are attractive as the 5y5y forward spread is still wide at 380bps and foreign real money investors were also more active in buying yesterday. Foreign bond holding decreased to the historical bottom of Ft2400bn in March and has started to climb again in last days, which could foreshadow that foreign investors are probably light on Hungarian bonds. The outlook could also depend on the currency as high yields are usually compared with the exchange rate risk and if the forint stabilizes in the next weeks, it may bode well for additional demand for bonds.

Risk is mainly stemming from inflation after the market has become aware of the political and fiscal issues. The weak currency could have been pushing up inflation more than the market expects and therefore incoming inflation figures, like the March data due on April 10 could cause temporary weakness. Those however could be buying opportunities as the medium-term outlook may improve on additional fiscal measures and slowly reviving risk appetite.

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