Correction on global stock markets had limited impact on CEE fixed income markets
|CEE currencies slightly eased last week (less than 1% w/w), while bond yields hardly moved. Higher fluctuation in HGB yields has been rather related to doubts on whether unconventional monetary policy tools recently adopted by the MNB will be effective to counterbalance the global trend of rising yields.
'Has there been any spillover from the recent correction on global stock markets into CEE fixed income markets?'
Croatia: Markets thus far have been fairly resilient to global market moves. Hence, the exchange rate has traditionally (given the monetary policy setup) shown no volatility and continues to move below the 7.45 level. The 10Y LCY yield moved further downward to below 2.30%, continuing to reflect improved fundamentals, high LCY liquidity and a strong appetite from the local investor base. The long end of the EUR curve showed only a modest yield uptick (to 5bp), continuing mostly to reflect the ongoing spread-tightening scenario, as the DE benchmark trends higher. As expected, the most aggressive move was seen on the USD curve, where the longest tenor (USD2024) re-priced up approx. 30bp w/w, mainly reflecting market jitters and the uncertainty over the US rate outlook.
Czech Republic: The development of the Czech economy has remained favorable, with very low macroeconomics risks, and this is expected to continue in the coming years. The Czech National Bank has been gradually raising interest rates and the koruna has been appreciating. Thus, the recent correction on global markets had almost no impact on the EURCZK and yields, in our view. However, we should expect higher volatility for the koruna, mainly as some market participants are still too optimistic about monetary policy tightening this year, in our view, which could in turn slightly depreciate the koruna towards 25.30-25.35.
Hungary: The 10-year reference yield jumped to 2.60% in Hungary from its year-end level of just 2.02%, while the spread over the respective German Bund yield rose to around 190bp. This means that, despite the central bank’s continuous efforts to keep the whole yield curve at as low a level as possible, the domestic bond market has not been resilient to changes on global markets. Not long ago, the MNB changed his communication, as they said that they would primarily focus on spreads over major bond yields. We think that the MNB will continue its unconditional IRS tenders and mortgage bond purchases to maintain stable spreads. Thus, movements of global bond market yields seem to be the most decisive factor in terms of the formation of domestic bond yields. Overall, depending on changes on global markets, the 10-year bond yield potentially could be somewhat higher this year than our current forecast of 2%.
Poland: For most of the week, the bond and FX market has been relatively stable, as both the zloty and 10Y yield have been holding in a relatively tight range. The weakening of the zloty toward 4.19 vs. the EUR (from 4.15 on Monday) and increase in long-term yields to 3.6% (from 3.55% on Monday) took place only toward the end of the week, mirroring the development on the core markets and increasing global risk aversion. As far as the FX market is concerned, the MPC meeting and return of clear dovish rhetoric could also keep the zloty slightly weaker than in the previous weeks.
Romania: The RON yield curve has steepened since the beginning of February, with long-term yields rising by 10bp and short-term yields almost constantly under the influence of the significant liquidity surplus in the market. It is hard to discern how much of this curve steepening was driven by the correction in global equity markets and how much was due to domestic factors like the backdrop of rising inflation, strong economic growth and risks related to the current account and budget deficits. Last week’s auctions on the primary market were mixed, with modest bids at Monday’s auction for 2022 bonds and issuance below the plan by the Ministry of Finance, but strong investor interest at the auction for bonds maturing in 2024 held on Thursday. On the FX market, there was nothing special in February and the leu was range-bound within 4.63-4.66.
Serbia: Serbian bond yields recorded a mixed performance last week. LCY yields remained relatively flat, despite the presence of foreign (mostly US-based) investors on the domestic bond market. The benchmark RSD 2023 yield even compressed by a few basis points. On the other hand, USD Eurobond yields took a hit of 10-20bp and thus followed a pattern seen in most emerging markets. However, Serbian USD yields have gradually been moving in an upward direction for months, following Fed tightening and an increase of benchmark yields, so this reaction was expected. As for LCY yields, we still see some potential for milder spread compression, supported by stronger fundamentals - the expected acceleration of economic activity, notable reduction of public debt, lower financing needs and improved external stability.
Slovakia: The recent global stock market rout did not have a significant impact on the Slovak market. Yields on 10Y Slovak government bonds increased to 0.94% on the first day of the turbulence, but later returned to lower levels and started a gradual climb again. Overall, yields on Slovak government bonds have been in an upward trend this year. However, the rise in German Bund yields has been even more pronounced, thus narrowing the 10Y spread to around 19bp. We expect a further rise in Slovak bond yields, reflecting the steady return of inflation, the move towards a more hawkish stance at the ECB and the expected tightening of monetary policy in the US. However, increases will still be mitigated to some extent by the duration of QE and Slovakia's good fiscal stance. We expect the 10-year government bond yield to be around 1.05% in 1Q18 before rising to 1.25% by the end of the year.
Slovenia: Slovenian bonds fared well in the turbulent week behind us. The long end of the EUR curve showed only a modest yield uptick (approx. 5bp), while in the recent period, Slovenia was mostly tracking the DE benchmark trajectory, as the spread remained in the region of 40bp. The USD curve came under some upward pressure, with the longest 2024 tenor yield up approx. 10bp w/w.
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