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2022/01/14 / Erste Group Research

Juicy spreads on government bonds


The peak in inflation is generally expected in the first half of 2022. As central banks are concerned about second-round effects, monetary tightening will continue at least until mid-2022. LCY bonds offer very attractive yield at this time. For how long?

CEE governments are going to benefit from an extension of the average maturity of their outstanding debt in 2020-21, as they exploited favorable financing conditions - compressed long-term yields on both domestic and global markets and also the availability of new instruments like loans from the SURE mechanism. CEE countries thus kept the amount of debt they have to roll over in 2022 at a rather low level and on top of that governments are going to run lower deficits in 2022 compared to 2021.

Although short-term real interest rates are still negative in CEE due to the spike in inflation, 10Y yields are staying well above the inflation target of CEE central banks or average inflation reported over a longer time span, likely implying a positive real yield on the 10Y investment horizon if central banks manage to bring inflation back to their target within a reasonable time. Yield spreads between 10Y CZGBs and 10Y Bund are at 320bp, an all-time high and three times higher than the average spread observed in the last decade (100bp). We forecast a slight decline of yields on LCY bonds and narrowing of very generous spreads vs. German Bunds this year.

We expect a positive rating action for Croatia’s sovereign rating from all three major rating agencies this year, thanks to looming EMU membership. Serbia’s rating from Fitch and S&P is just a notch below investment grade, with the latter agency having a positive outlook. Serbia has a clear ambition to get upgraded to investment grade, which would definitely boost demand at the long end of the curve. Romania will be reviewed by Fitch on April 8 and we expect it to follow the other two major agencies, which have already returned the Romanian credit outlook to stable.

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General information

AuthorErste Group Research
Date2022/01/14
Languageen
Product nameCEE Bond Market Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-
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