CEE Bond Market Report - 3Q19
Plummeting yields on core markets dragged yields down across CEE region. We see no change in key rates in CEE for remainder of year, except for Serbia (-25bp). Croatia, with strong ambition to join ERM II next year, outperformed other CEE peers.
Gathering clouds over global economic growth have turned both the ECB and Fed more dovish. The ECB is preparing for more stimulus to the euro area economy unless the outlook improves, while Fed Chairman Powell hinted at preparedness for an early rate cut. Tensions surrounding the trade tariffs between the US and China have reduced the predictability of global trade and weighed on the global economy.
Plummeting yields on core markets due to gloomier growth prospects, and increasing expectations for rate cuts by major central banks, dragged yields down across the CEE region. CEE bond market performance has been strong since the beginning of the year. Our LCY CEE Bond Index increased by 3.6% YTD, while the CEE Eurobond Index went up by 3.3% YTD.
Local bond issuance has shifted to lower gear in CEE in 2Q19 after seasonally very strong issuance in 1Q19. The focus was more on extension of maturity. Croatia and Serbia made use of the very favorable situation on the international market and placed 10Y Eurobonds worth EUR 1.5bn and EUR 1bn, respectively. For Serbia, it was the first euro-denominated Eurobond issued for the last six years. The Romanian government tapped foreign markets in early July with two issuances (12Y and 30Y) through which it borrowed EUR 2bn.
On the fiscal side, we have seen some deterioration, particularly in countries heading for parliamentary elections (Poland this autumn, Romania and Slovakia in 2020) and economic growth does not provide as strong windfall revenues as in the past. Hungary and Romania have been confirmed to stay under the EU’s Significant Deviation Procedure (SDP) for breaching the preventive arm of the Stability and Growth Pact, which is applied to countries which do not converge to their Medium-Term Objective target. A recently adopted generous social package in Romania that increases public pensions in 2019-21 will result in a budget deficit increase to 4% of GDP, in our view.