4Q18 CEE bond market report
Deflationary risks in CEE seem to be gone, against the backdrop of strong economic growth, ever tighter labor markets and the revival of credit flow. Consequently, rates and yields have accordingly increased in most CEE countries in recent quarters. A positive development is that the major part of the yield increases is over and only about a 30bp yield increase on average is expected in the coming four quarters. We have seen increases more front-loaded outside the Eurozone, while yields in Slovakia and Slovenia have remained at very low levels. Given that the ECB’s QE program is nearing its end, both countries are at risk of higher yield increases.
The Czech central bank seems to be taking its task to keep the inflation rate near its target very seriously: with one of the tightest labor markets in the whole of the EU, the CNB will likely continue hiking its key interest rate unless the koruna starts to appreciate, although this is already priced into bond yields. The other end of the spectrum is Hungary, the country with the second tightest labor market in the region, with both headline and core inflation relatively high in the region, but the central bank still maintaining a dovish tone in its statements. Looking at the implied forward curves of CEE countries, it seems that the risk of higher yields in the horizon of 3-5 years is well priced into current bond prices, while the very steep short end (up to 3Y) points to an increase of short-term yields in the next couple of years in all countries except for the Czech Republic, where the forward curve is relatively flat, compared to others.
CEE countries are in relatively good position in terms of debt issuance this year: 62-100% of planned financing had already been carried out by the end of September. Efforst of countries to increase funding in their local currency (Hungary being followed by Serbia and most recently Poland) and selling retail paper (Hungary might increase the already high stock, and Romania has started its retail bond program), combined by recent, successful Eurobond issuance in Romania and Hungary, makes us think that issuing of FX debt will not be overwhelming in the coming months in CEE.