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Erste Group: CEE Macro/Fixed Income Daily

February 8, 2013
Analysts’ Views

RO Bonds: Although the MinFin managed to sell the planned RON 500mn in 5-year T-bonds, the average yield was significantly higher (5.79 %) than at a similar auction held three weeks ago (5.40%), as fears about rising inflation resurfaced. Investors put in bids totaling RON 852mn, which corresponded to a bid-to-cover ratio of 1.7. We expect inflation to slow gradually in the second half of the year, helped by a normal agricultural year, and see chances of 5-year Tbond yields easing towards 5.3% in December.

HU Auction: Demand was somewhat lower than usual at yesterday’s bond auctions, amounting to HUF 106.2bn altogether for the three papers. The Debt Management Agency sold HUF 50bn worth of papers altogether, only HUF 5bn higher than originally planned. In the afternoon at the non-competitive tender, demand for papers was even more subdued; only an additional HUF 4.3bn were sold from the 3Y and 5Y papers. The maximum yields of 3, 5 and 10y papers were 5.49%, 6.02% and 6.49%, respectively. Compared to the latest auction levels held two weeks ago, the maximum yield of the 3y paper declined by 13bp, however in case of both the 5Y and 10Y papers there were some increases in yields (6-22bp). This is in line with our view that while the expected continuation of CB rate cuts will put downward pressure on yields at shorter maturities, , the effect of rate reductions is more marginal in longer maturities and yields could even increase if investors feel increased risks surrounding Hungary’s economic and monetary policy. More yield increases at the longest maturities cannot be excluded in the shorter-term and we expect the 10y yield to stand at 6.70% at the end of this year.

Traders’ Comments:

CEE Fixed Income: Poland’s borrowing costs rose at yesterday’s bond auction for the first time in nine months. The Finance Ministry sold 5.8 bn PLN of 5y bonds due in April 2018 and 4y floating-rate notes due in January 2017, falling short of its maximum target for a second time in a month. The 5y yield advanced to 3.52 % from 3.44 % at the previous auction on January 23, the first increase since May 2012. The biggest yield move in local currency CEE government bonds in the secondary market was seen at the short end of the POLGB curve. The entire yield curve has been below the base rate for a little while now but 10y POLGB yields rose above key rates when they were cut to 3.75% at the most recent rate cutting meeting on February the 6th after hitting a wide of more than – 50 bps around the turn of the year. It seems to be general consensus that the long end is unloved as yields head higher but the bid to cover ratios at yesterday’s auctions send a different story with regards to the mid segment of the yield curve ( 2017 1.35x, 2018 2.12x). Here it seems that expectations of higher yields are more subdued given that the bid to cover for the floating rate note (1.35x) was so far below that of the fixed coupon bond (2.12x). Elsewhere, we see an outperformance Croatian Eurobonds as the market stabilizes following the recent rating downgrade.