CEE Bond Market Report - 2Q19
Rating developments are positive or stable in CEE, while dovishness of global central banks helps CEE bond markets. On the other hand, Eurobond issuance is becoming an ever-lower priority for regional governments.
The external environment for CEE bond markets turned more supportive in recent months, as major central banks became more dovish and delayed rate tightening substantially. But while yield spreads over 10Y German Bunds have been more or less stable in most cases, some countries failed to see yields falling to a similar extent.
The Czech 10Y spread over Bunds is around its historic highs. While a possible global slowdown could affect the Czech Republic to a large extent, its public finances are in very good shape (low public debt, budget in surplus for years), and external indebtedness is also low. Thus, we do not see the increase of the spreads on the Czech bond market being fundamentally justified. In other cases, spreads actually narrowed: in the Croatian case, it is around all-time lows, with the 10Y HRK yield printing below 2 percent. While government debt is relatively high, fiscal developments have been impressive in recent years, while inflation is still quite low in Croatia, and the central bank is also supportive. Thus, we do not see the Croatian spread as too low to warrant any quick increase in yields.
Favorable rating developments also continued. Hungary and Croatia have received upgrades so far this year, while Romania managed to avoid a downgrade in the ‘BBB-’ outlook to negative. We expect to see further upgrades in the cases of Hungary and Croatia this year.
Most countries have carried out significant financing in 1Q19, proportionately much larger than just one quarter of the full-year plans. We have seen active issuance in Slovenia, Poland and Serbia so far this year. On the other hand, Romania fell behind the schedule in January, as the market pressure caused demand to fade. This slowdown could, however, partially be restored in February and March. In Hungary, sales of retail bonds is also behind schedule. That said, we do not expect to see major disruptions in government paper sales. As far as FX debt sales are concerned, we continue to see the strategy of many CEE countries to keep FX issuance low or outright at zero, while in cases of higher planned issuance for the year (i.e. Romania), we have seen a strong narrowing of the financing gap in recent weeks, due to Eurobond issuance.
The fiscal outlook is mixed. While several countries still boast a fiscal surplus, Poland’s recent announcement could mean a maximum of a 2 percentage point higher budget shortfall next year (and up to 0.8 this year). That said, low inflation, stable monetary policy and a supportive external environment could help Polish bonds. Overall, looking ahead to yield developments, we mostly do not expect big changes in yield spreads in CEE. The external environment could remain supportive, while fundamentals would not justify spread widening either. Yields could move in close correlation with German Bund yields.