CEE Macroeconomic and Fixed Income Research

Analysts’ View:

RO Bonds: Yesterday, the MinFin tapped the local market with a three-month treasury bill that rounds off the issuance calendar for February. Although demand surpassed the allocation (~1.7x), the ministry decided to raise fewer funds than it had initially planned (about RON 355 mn vs. RON 500 mn) as investors asked for a higher yield. The average accepted yield stood at 1.24%. On the secondary market, yields stayed almost unchanged. It appears that investors have adopted a wait-and-see attitude due to the latest developments in Greece. We see 5-year ROMGB sovereign bond yields hovering close to 2.3% throughout 2015.

HU Rating: Credit rating agency Moody’s released a statement yesterday regarding Hungary’s growth outlook but this did not constitute a rating action. The tone of the updated release was rather sharp. In Moody’s view, the potential growth of the Hungarian economy is limited by structural factors (such as weaknesses in the business environment and rigidities in the labour market). Last year’s growth figure ‘is unlikely to be repeated’ as the GDP growth rate is likely to decelerate significantly this year, in their view. According to Moody’s, the banking sector is weak and its ability to support credit growth should remain limited. Moody’s expects the gross public debt-to- GDP ratio to ‘continue to remain sizeable in 2015’ and ‘will slowly decline to 76% until the end of this year’. In addition, the agency considers the level of FCY-denominated debt to be high. In our interpretation, the message of the statement is that Hungary should not expect an upgrade back to investment grade from Moody’s this year. Our market forecasts remain unaffected (10y HGB yield at 1.89% and EURHUF at 323.5 by year end).

Traders’ Comments:

CEE Fixed income: Yesterday, CEE government bonds reversed the losses they suffered on Friday as confidence grows that the Eurozone will indeed extend financing to Greece and fighting in Ukraine subsides. The FT summed it up nicely, commenting that “experience suggests that a debt deal with Greece may be only marginally more durable than a ceasefire in Ukraine” but markets just want to move on it seems. IFO expectations rose once again month on month for the fourth time in a row but were slightly below the consensus and details of 4Q14 German GDP growth released earlier this morning showed an above consensus rebound in both private consumption and capital investment as the German economy grew 1.6% y/y on a nonseasonally adjusted basis. The biggest surprise was in construction investment which grew more than twice as quickly as analysts had expected and with private consumption contributing 0.4 pp to the 0.7 pp q/q overall growth rate, hope is growing that Germany is not dependent on external markets or a weak EUR. This is undeniably good news for CEE where most economies count Germany as a major trading partner. The combination of a growth recovery in the US and Germany coupled with the ECBs QE should give a boost to the carry trade in CEE resulting in a combination of both stronger FX and lower yields in the higher yielding markets. The Czech market stands out as an exception given that the CNB has to be seen to be committed to the EURCZK floor and yields on CZGBs are more likely to follow Bunds. Barring some kind of “Grexident”, the focus will now turn to Yellens testimony as investors look for clues about when the Fed will start hiking rates. One fly in the ointment came when the local press in Austria indicated that Heta, the HypoAlpeAdria bad bank, would not repay EUR 950 mn of floating rate securities due March 6 and March 20. This is all the more ironic given the recent lambasting of Greece by Austria’s finance minister. The bonds fell to 80 cents on the Euro.