CEE Macroeconomic and Fixed Income Research

SI Bonds: The hunt for yield continues and Slovenia is a beneficiary.

Analysts’ Views:

SI Bonds: After the successful 3Y and 7Y bond issues on Tuesday, Slovenia may consider buying back some shorter maturities, or execute bond switches to swap short term debt for longer dated government paper, Reuters reported yesterday, citing unnamed sources. The country has already managed to collect the necessary cash to finance this year’s redemptions, and even prefinanced some of the debt falling due next year. However, due to its still shaky fundamentals (the weak growth outlook and a fragile banking sector potentially implying additional capital), the financing outlook remains demanding also in the upcoming years, which is a reason to smooth out the redemption pattern and mitigate some of the risks. Around one third of Slovenia's EUR 24bn of debt falls due over the next three years, with a hefty EUR 4bn (11% of GDP) in 2016 alone. The exact bonds affected by potential buybacks or switches were not named. Near-term financing concerns have receded while mid-term funding stability is contingent on a continuation of fiscal consolidation and a long-term solution for the vulnerabilities of the banking sector. Hopefully, the encouraging market sentiment will not foster policy makers‘ complacency.

TR Rates: The CBT is organizing an investor meeting in London today. We expect the Bank to signal a limited macroprudential easing to be introduced at its April meeting. If the CBT also indicates that it could ease liquidity management, this may lead to a decline in short-term yields. We continue to see the two year bond at around 10.5% by year-end.

Traders’ Comments:

CEE Fixed Income: CEE fixed income markets consolidated yesterday with profit-taking in government bonds and a move from bid-only to 2-way trading in the cash corporate space. All eyes will be on the ECB today and then the US Non-Farm payrolls tomorrow. Barring any big surprises from these two events, it looks like the path of least resistance for all the excess liquidity currently sloshing around in the system is toward the purchase of higher-yielding assets.