This week same rated Guatemala – a less established issuer – achieved a better pricing, with a longer dated bond in USD than Hungary (benchmark spread HU: 335 & 345bp vs. Treasuries for 5 and 10 years vs. Guatemala 300bp for 15 years). Recent placements by Serbia and Hungary will also motivate other issuers (Romania, Croatia) to tap markets soon. Weak GDP data this week showed that there is still no turnaround in economic activity in CEE. In the Czech Republic it seems that there is more clarity regarding the future FX path. We expect the CNB (flying below the radar of the G-7 and G-20) to keep FX interventions as a monetary policy tool on the table. However, since we expect the economic outlook to improve, we foresee a CZK appreciation – tolerated by the CNB - in H2 2013 (more on monetary policy and FX implications on p.2 in the Focus on section).
Romania– After three tenders with bid-to-cover ratios close to 1.5, demand improved at yesterday’s 3y auction. Total bids surpassed the tapped amount (RON 400 mn) almost five times over and the Ministry of Finance managed to push yields at the lower end of secondary market pricing. Non-residents seemed to return their attention to Romania, probably because elevated yields and RON softening vs. EUR were seen as a good entry point. As a result, yields drifted by some 15-20bp lower in the last couple of days. Along with signs of demand for RON-denominated T-bonds coming from non-residents, Romania also issued a 10Y USD-denominated Eurobond (USD 1.5bn at the upper threshold announced), covering almost half of the volume announced to be tapped from external markets this year. The yield paid 4.5% was slightly below indicative yield (4.625%), but a touch above the 4.2% quote of a similar instrument on the secondary market. Next week, we expect 1Y yields to soften on improved liquidity conditions, while longer yields may correct some of their recent increases. The Ministry of Public Finance could continue to tap the announced amount.
Poland– Uncertainty regarding the future key rate path is increasing once again. After the relative “hawkishness” of the last MPC statement, some MPC members are talking about the need to switch to a “wait and see” stance fairly soon, while others are talking about key rates at the 3–3.25% level. Weak European GDP data and slightly increasing yields did not provide support to EUR/PLN. Polish 10-year yields are currently flirting with the 4% level as it seems that some large international players do not see much value left in Polish government bonds. We think that the current environment could last into next week.
Weak economic data (industrial production at 0.2% yoy at best, possibly even in negative territory next Tuesday) and low inflationary pressure (CPI inflation this Friday at around 2% yoy) should still provide some support to the bond market, but risks on the fiscal side (e.g. in terms of the need to revise the budget) are mounting. Although these changes should not be significant for the bond market because they do not entail an increase in borrowing needs, they could at least put some investors that were banking on the strong public finances in Poland on alert and result in slightly higher yields. However, we still do not expect strong upward pressure on Polish yields (as long as there are no significant increases in yields on the core markets) and the MinFin’s recent announcement that it will borrow more on the short end of the curve is also supportive.
Hungary– With the USD 3.25bn issuance Hungary managed to sell its first FX bond since May 2011. The pricing of 335bp over US Treasuries in the 5y bond and 345bp in the 10y bond was fair in our view but not particularly cheap. Nevertheless, the placement went smooth and should have heralded the end to IMF negotiations regarding a standby arrangement. The issuance was swapped into EUR 2.5 bn. According to the Hungarian Debt Management Agency EUR 5.1 bn worth of foreign exchange debt expires in 2013 of which EUR 4-4.5 bn are planned to be repaid through FX bond issues. With this issuance slightly more than half of this plan was reached. The stage is set for calmer trading next week as few relevant macro data are scheduled to be released. Friday’s commission deficit forecasts will be the most important piece of data – they will tell us whether Hungary can be let out of the EDP. Until then, the Hungarian yield curve is expected to steepen further as short-end yields fall due to the rate-cutting expectations. These have been reinforced by dire real economic data this past week: The Hungarian economy contracted far more than expected, with GDP shrinking by 0.9% qoq. However, longer-term yields are still above 6%, reflecting a hefty risk premium.
