CEE Macroeconomic and Fixed Income Research

Analysts’ view

RO Bonds: The MinFin raised slightly more funds than initially planned in the T-bond issue maturing February 2027 (RON 250 m vs. RON 200 m). As investor appetite for longer-maturity bonds remained strong (the bid-to-cover ratio was 3.1), the average accepted yield fell sharply to 3.30%, down 91 bps from the last reopening in mid-November. Debt managers recently announced that Romania will also tap the external market with a USD-denominated Eurobond issue in 1H15. We see the 5-year ROMGB yield at 2.5% in 1Q15, acknowledging at the same time that the risks are tilted to the downside if the ECB conducts a full-scale QE program.

TR Rates: The CBT will hold its first regular MPC meeting of 2015 today, where we do not expect any change in interest rates although we acknowledge that the risks are geared towards a rate cut. The forward swap market is pricing a 115 bp cut in the next three months and bonds are pricing in a 100 bp cut for the medium term. Currently, the policy rate is 8.25%, surrounded by a corridor of 7.5% and 11.25%. In our view, annual CPI will fall visibly starting from January conceivably dropping below 6% during the summer. However, if we stick to Governor Basci's own guidance that the CBT will not be convinced about an improvement in inflation outlook unless the core inflation trend drops below 5%, then any cut should wait another month. We see a 50 bp rate reduction by the end of this quarter. Global growth worries continue to push yields lower, but we do not see these levels as sustainable unless the tightening of US monetary policy is delayed (we foresee the twoyear yield at 9% by end-2015).^

PL Macro & Rates: Employment and nominal wage growth are due today. The continuation of positive trends is broadly expected as the market consensus expects employment to increase by 1.0% y/y in December and wages to go up by 3.2% y/y. The data should be neutral for markets with investor focus squarely on the ECB meeting on Thursday and the announcement of the QE program. Monetary easing is also being debated on the domestic market. On the one hand, Chojna-Duch has suggested that a policy rate adjustment may be needed if deflation deepens, but on the other hand, Zielinska-Glebocka pointed out that recent FX development favour a “wait-and-see” approach. Governor Belka also sees the weak zloty as a factor that delays a possible rate cut. In our view, rate cut expectations support the bond market and we see 10Y yields at 2.15% at the end of 1Q15.

Traders’ Comments:

CEE Fixed Income: Yesterday was a mixed bag for CEE fixed income with little for investors to go on given a dearth of economic data and low levels of activity due to the absence of US investors stemming from Martin Luther King Day. A third consecutive rise in the ZEW this morning won’t come as a surprise and will likely be dismissed just as the quickly as the lowest growth rate in China since 1990. The IMF is also widely perceived to be behind the curve so the steepest downward revision to its global growth forecasts in 3 years won’t ruffle many feathers either. Fact is, markets are infatuated with the prospect of QE in Europe and there’s no other game in town even though nobody seems to think it will have a positive impact on growth prospects. No surprise then that sovereign debt yields are generally heading south and yield curves are bull flattening. Policymakers are also struggling to get to grips with the side effects of QE. Just as the SNB dropped the EURCHF, the CNB must be contemplating the same risks in its strategy to intervene in EURCZK and if we take comments from NBP Governor Belka at face value, the negative impact on the value of the zloty will also affect monetary policy and potentially put off the possibility of rate cuts. Yields on POLGBs were slightly higher along with a weaker zloty. While this may look like an outlier because common consensus is that yields on everything in fixed income should now go lower, if QE doesn’t work then yields on safehaven debt will go to zero (or lower) but not risk premiums. One just needs to look at financials for an example of this. Indeed, if QE is a futile attempt to kick-start growth then banks should logically struggle along with riskier corporates and, by extension, weaker sovereigns. That said, the price readjustment has already gone a long way and we have seen local investors attempting to bottom-fish polish bank bonds.