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Erste Group: CEE Macro/Fixed Income Daily

November 29, 2012
Analysts’ views: 

SK Macro: Slovak economic sentiment recorded another decline and hit a 3- year low in November, with the 3-months average declining from 86.1 to 83.7. The drop was most pronounced in industrial confidence, which was impaired by decreasing expectations for new orders in the next 3 months as well as lower current orders. This shows that the economic slowdown in the Eurozone is slowly transferring to the Slovak economy as well. Other components showed deterioration as well, with consumer confidence being the only one recording a positive development. As in the past, sentiment was worst in the area of construction, which is still suffering from a reduced number of infrastructure projects being built this year. These results suggest further deterioration in industrial production and the economy in the next few months – which could in turn lead to lower tax revenues. We see GDP growth at 1.3% in 2013 and 10y government bond yields correcting to 2.9% in the third quarter 2013. 

HU Eurobonds: Reuters reported yesterday early afternoon that the Hungarian government is considering tapping foreign markets in the near future in order not to ‘overstrain’ the local currency bond market by excessive issuance. Economic Ministry State Secretary Gyula Pleschinger said later that in 2012, the ministry is not planning any FX bond issuance, while any Eurobond sale in 2013 will depend on market conditions. ‘The timing can also depend on whether there will be an IMF agreement and if there is, exactly when,’ Pleschinger added, also noting that the early afternoon statement of the Ministry ‘obviously reflected that we will clearly not finance all expiring foreign currency debt from forint issuance’. In 2013, more than EUR 5bn of FX debt will mature, while the cabinet held EUR 3bn in deposits at the central bank at the end of October (however, more than EUR 2bn FX debt matures in Nov-Dec). Thus, given that HUF bond maturities will also increase in 2013, it will indeed be difficult to go on with this year’s practice: issuing HUF bonds only and exchanging HUF liquidity for FX at the central bank to service FX debt. (For further details on the redemption profile and the liquidity situation of the state, read our latest Macro Outlook published yesterday.) We expect to see10y HUF bond yields at 7.1% at end-2012 and at 6.5% at end-2013. 

Traders’ Comments: 

CEE Fixed Income: Volatility in our region is collapsing. Irrespective of the market; CDS, FX, local currency government bonds, Eurobonds: The carry trade is in favour with investors. A combination of low growth, low interest rates, modest inflation and further austerity along with the past experience of an upward trend in bond prices with only intermittent bouts of risk-off and declining liquidity all contribute to a situation where investors prefer to stick with their bond positions. The risks are clear and the biggest risk at the moment appears to not being able to get back into the market if you get out on a risk off day. Trader inventories are low and any axe on the offer side is snapped up within minutes. Poland is the star performer in our region. PLN bonds returned 2.8% measured in EUR this month, second only to Greece. November was the sixth straight month of declines in yield on 10y debt. The yield on the 10y benchmark POLGB hit a record low of 4.08% yesterday. We think there will be shift toward riskier sovereigns, corporate debt and longer maturities as investors continue to seek yield pick-up. The yield on Ciech SA’s EUR 245 m 2019 Eurobond fell to 8.71% yesterday from 9.5% when the company completed bookbuilding a week ago.