CEE Macroeconomic and Fixed Income Research

Analysts’ Views:

PL Macro: The inflation rate continues to be negative (-0.3% in August), but there is nothing surprising about this outcome. Little demand pressure as well as other factors, such as the Russian embargo, are strengthening disinflationary tendencies. We expect a similar trend in the coming months, with the associated risk that the scale of monetary easing will be greater than we currently assume (a 50 bp cut overall). Such a scenario supports low levels of yields and works against the zloty’s appreciation (we forecast EURPLN 4.18 at end-3Q14). However, today’s data on labour market conditions may bring some optimism, as employment and wages are expected to increase (market consensus at 0.8% and 3.8% y/y, respectively).

RO Bonds: The MinFin reopened a 10-year T-bond issue with a residual maturity of June 2021 and sold RON 244 mn, far below their initial plan of RON 400 mn. Despite strong demand from investors, the yield nudged up to 4.26% (+12 bps compared to the previous auction held a month ago). We continue to see yields on the secondary market going marginally higher in future months, due to unrelenting geopolitical tensions, the presidential election in early November and some populist measures amid already weak budget revenues collection. Our year-end 5Y ROMGB yield call for this year is 4.1%.

TR Macro: The seasonally adjusted unemployment rate surged to 9.9% in June from the previous month's 9.5%, which is the highest level since January 2011. The decline in the number of employed people was the reason behind the dismal data but the unemployment rate may start dropping in the coming months in tandem with the recovery in activity. The 12-month rolling budget deficit improved to 1.3% of GDP from June’s 1.5%. The current budget deficit is much better than the government’s 1.9% year-end target. Last quarter’s data will be very influential in determining the entire year’s fiscal performance. Despite the strong fiscal performance, yields could come under upward pressure from the Fed. Our two-year bond yield forecast for the year-end is 9.0%.

Traders’ Comments

CEE Fixed Income: CEE fixed income was soft in yesterday’s trading session with little in the way of turnover in secondary markets and investor attention focused on primary issuance. HYPO NOE Gruppe Bank AG issued a EUR 500 m inaugural mortgage covered bond rated Aaa by Moody’s at ms+7 bps with a final book amassing EUR 1.25 bn as a total of EUR 4 bn in primary issuance came to market in Europe. On the topic of Austrian banks, the new Finance Minister reiterated what most of us already knew in a public statement in Milan when he said he cannot provide further support to Oesterreichische Volksbanken AG if the European Central Bank finds its capital insufficient.
According to the local press, the capital shortfall may amount to EUR 800 m. NPLs in CEE have put pressure on Austrian bank bonds in general and the conflict in Ukraine has put additional pressure on RBI in particular culminating in what now could be an interesting relative value trading opportunity as callables have been harder hit than bullet bonds, opening up the opportunity for cash take-outs e.g. the RBIAV 6 16/10/23 is currently bid at 102.75 YTM 5.6% (asw +450 bps) whilst RBIAV 5.163 18/06/24 is offered at 97.50 YTC (9/19) 5.77% (asw +516 bps).