CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

HU Rates: MNB Monetary Council member Mr. Pleschinger said yesterday that he sees risks stemming from any further rate cuts as a change in global sentiment can significantly increase risks for Hungary. This comment is not a surprise as he is acknowledged as the most hawkish member of the MNB. He also told the press that he finds it unnecessary to use central bank FX reserves to solve the FX mortgage loan problem. FX reserves now exceed widely used rule-of-thumb measures (e.g. the Guidotti-Greenspan rule). We reiterate our expectation that the MNB will cut the base rate further next week by 10 bps to 2.5% and will keep this level unchanged for the rest of the year. We maintain our 10Y yield forecasts as well (6.00% for the year-end).

CZ Bonds: At yesterday's auction, the Czech MoF sold in total CZK 11 bn worth of government bonds due 2019, 2025 and 2036. Regarding the recent shrinkage in yields, the average yields declined significantly in all three maturities. The biggest drop was recorded in the 5Y issue, where the average yield went down to 1.140%, from the 1.461% reached during the auction held in February. The issuance activity of the MoF is expected to decline over the remainder of 2014, to a large extent as a result of a mounting liquidity surplus. In spite of a prospective reduction in the auctioned amount in 2014, we see the yields on 10y T-bonds to rise to 2.37% at the end of the year.

SK Fiscal: Slovakia’s general government deficit reached 2.8% of GDP in 2013 and was thus significantly lower than the 2012 figure (4.5% GDP). Although Eurostat did not recognize the sale of state oil reserves as budgetary revenue, the deficit was still lower than the government’s target of 2.9% GDP. On the other hand, public debt increased further, reaching 55.4% GDP and surpassed another threshold stipulated in the debt brake law. Hence, the government is required to cut expenditures by 3% this year. Overall, the figures show another improvement in public finances which forms a good base for exiting the EDP and utilization of the investment clause. However, the government will first have to present further consolidation measures to the EC that will replace some of the expiring one-off revenues (as the EC’s current forecast still sees the SK structural deficit expanding in the coming years). We currenty forecast 10Y yields (SLOVGB 3 ⅜ 11/15/24) at 2.8% by year-end.

TR Rates: We do not expect any change in key interest rates or the reserve requirement policy, which is also the consensus view at today’s MPC meeting. On the other hand, the CBT is likely to drop its reference to the need for tight monetary policy in its statement and signal rate cuts for the coming months. Given the CBT Governor’s dovish remarks throughout April, there is the risk of a limited cut in the upper boundary of the interest rate corridor and a measured macroprudential easing via a reserve requirement cut or the initiation of some remuneration on TRY reserve requirements. An interest rate cut could be negative for the USD/TRY which is trading below our 2.25 yearend forecast.

Traders’ Comments:

CEE Fixed Income: Turnover picked in in cash CEE corporates yesterday but without any major catalyst. In local currency government bonds, yields on HGBs backed up and Hungary underperformed in our region. The HUF is also under pressure at the beginning of today’s trading session as speculation rises that the MNB will soon hit the wires with something of significance, maybe related to FX reserves. Romania will re-tap the DBN032 today. Price guidance from the trading desk is for a yield of 2.8% +/- 5 bps. The DBN034 outperformed yesterday after JPM announced it will be included in the GI-EM index as of the 1st of May.