CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RO Bonds: Romania raised RON 300 m according to plan in a T-bond issue that has a residual maturity of slightly above four years. The average yield stood at 3.1%, down from 3.32% at a similar auction held in mid-June. The news that Romanian bonds are going to be included in the JP Morgan GBI-EM Global Diversified Investment Grade index starting July 31 has led 10-year ROMGB yields to drift lower and the domestic currency to firm. Nevertheless, we continue to see the 5-year T-bond yields higher by December, as the upside risks remain in place; most of them are related to the November presidential election and some populist fiscal measures that caused the untimely departure of the IMF/EU team in June before completing the periodic economic review under the current stand-by arrangement. We see the 5-year ROMGB at 4.3% and the EURRON at 4.5 in December 2014.

HU Bonds: Contrary to the previous months, the Debt Management Agency could not notably increase the 3Y, 5Y and 10Y auction amount at yesterday’s tenders. The allotted amount was HUF 66 bn altogether (vs. the 65 bn plan), and investors did not demand any additional bonds at the non-competitive topup auction in the afternoon either. Yields also edged up slightly higher vs. the auctions held two weeks ago. The relatively low demand, however, can rather be explained by the unexpected end of the rate-cutting cycle announced by the central bank earlier this week and not by a decline in demand for risk. We see 10Y yields at 4.8% at the end of this year.

Traders’ Comments:

CEE Fixed Income: As we head toward the weekend, we’ll probably see some profit-taking. Amazon shares were down 10% overnight and the S&P500 is losing its upward momentum. This comes at the same time as 10y US Treasuries hit a road-bump falling from a session high of 100-12 to a low of 99-26 following surprisingly strong initial jobless claims in the US which have fallen to an 8 year low and came in well below the lowest analyst estimate. Some market participants are pointing to sharp losses in high yield bonds as the canary in the coalmine and media reports fretting about crowded trades, illiquid markets and asset bubbles are also making the front pages. This comes at the same time as the US alleges that Russian artillery has shelled Ukrainian military forces from within Russia just as the Ukrainian PM has stepped down and the EU proposes a raft of new sanctions. The IFO due at 10am today will be closely watched for further indications that sentiment in Europe’s strongest economy has not only peaked but is in a continuing decline. No wonder then that CEE fixed income stuttered yesterday, most notably in Hungary. The announcement of a bad bank and potentially HUF 300 bn of hitherto undeclared impaired assets related to real-estate loans on bank balance sheets and news that BayernLB has exited the market, selling MKB to the state, didn’t help. On top of this, Magyar Telekom announced plans to cut up to 1,700 jobs. Serbia 7.25% 21 has rebounded strongly recently and had a decent session yesterday but that performance will be difficult to repeat as the global mood sours and investors reassess risk-reward ratios in general. It’s early days and investors have been conditioned to buy on dips so not everyone is convinced that this is a watershed but turnover has been low in CEE fixed income recently and these developments are not conducive to a strong bid and FX markets are starting the day on the back-foot this morning.