CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

RS Rates: In line with our and market expectations, the NBS decided at yesterday's MPC meeting to keep the key interest rate unchanged at 8.5%. Even though inflation is moving below the target interval, the NBS felt no need for additional cuts, as it expects fading effects from low food prices and sees the CPI figure moving toward the center of the 4%+/- 1.5 bands by year-end.
Also, the official wording stresses the importance of increasing volatility on international markets, a factor which could affect foreign capital flows and risk premiums and additionally weaken the Serbian dinar (which has already hit a two-year low). Even though there were no official comments on fiscal policy, we can expect the NBS to closely monitor fiscal developments and government announcements, especially in September, when we should see the budget revision proposal and presentation of consolidation program. Looking to YE, we see room for more easing towards the 8% mark, primarily dependent on FX and fiscal developments (consolidation program and success of IMF talks).

HU Auctions: Despite the tensions of the last couple of days on the domestic bond market, demand for papers at yesterday’s bond auctions proved high, exceeding HUF193bn in total for the three papers (3Y, 5Y, 10Y). The 5Y bond was again the most popular among investors, likely due to attractive yield levels and the existence of the 5Y IRS facility provided by the central bank to commercial banks in order to mitigate interest rate risks. The Debt Management Agency sold HUF 75bn worth of papers altogether, vs. the offered amount of HUF 52bn. At the non-competitive tender held in the afternoon, an additional HUF 8.7bn of papers was sold. The maximum yields of the 3Y, 5Y and 10Y bonds were 3.68%, 3.99% and 5.01%, respectively.
Thus there were considerable (60-76bp) yield increases, compared to the auction levels seen two weeks ago. It’s favorable however, that there was some yield declines, compared to secondary market levels from a day ago, indicating declining tensions on the market. The forint has not really reacted to the good auction results, as movements of the local currency are to a more extent connected to global tensions. We expect somewhat stronger forint (307) at the year end, while the 10Y bond yield is expected to stand at 4.80, with some risks pointing to the upside.

Traders’ comments: The ECB meeting was overshadowed by the escalating political tension between Russia and the West. Newly announced counter sanctions by Russia banning a wide range of agricultural products from Europe and the United States is a first response by the country with further sanctions being considered in aviation such as a ban for flights over Siberia.
Client flow in corporate bonds indicated risk aversion to CEE names with most inquiries on the BID side. While the latest auction in Hungary proved successful, the EURHUF continued to trade at 316 area not far from all-time lows of 324. In HGBs we witness a pause in the selloff with yields trading 2 to 13 bps tighter d/d but with the trend remaining negative. German 10Y continued to set new lows, this morning trading at 1.027% while the US 10Y also headed towards 2.34%. This is on the back of positive initial jobless claims in US of 289k vs exp. of 304.