Erste Group: CEE Macro/Fixed Income Daily

Analysts’ Views: HR T-Bills: Issuance wise, yesterday’s T-bill auction followed a similar pattern to last week with the MoF opting for mid-size issuance (HRK 300mn & EUR 30mn). Once again, solid market interest, especially for the 12M HRK papers, allowed the MoF to go above the issuance target, keeping the roll-over ratio comfortably above 100% (HRK 238mn net issuance). While demand for HRK tenors was strong and resulted in higher than expected issuance levels, the MoF decided to issue EUR-linked tenors below the planned target level (EUR 25mn vs. 30mn) even though a solid bid-to-cover ratio (2.5x) pushed rates down by 19bp and 21bp, to 3.89% and 4.39% for 3M and 12M tenors, respectively. HRK rates moved down 30bp, 10bp and 20bp, respectively on 3M (3.80%), 6M (4.45%) and 12M (4.90%) tenors. Next week, we also expect a repeat of yesterday’s relatively modest issuance levels while the favourable money market outlook, supported by ongoing HRK strength and attractive EUR-linked rates, suggest negligible roll-over risks and potential for further rate drops. TR Rates: Following its Monetary Policy Council meeting, the CBT left the oneweek repo rate and the interest rate corridor unchanged, leaving the former at 5.75% and the latter at between 5%-11.5%. There were however, some technical adjustments. The CBT increased the share of TRY liquidity that could be kept in gold to 20% from 10% while eliminating the share of FX deposits that could be kept in gold which had formerly been at 10%. These measures were mainly aimed at supporting the CBT’s gold and FX reserves. The CBT’s statement after the meeting was quite hawkish with special emphasis on a possible deterioration in inflation expectations due to the rise in oil prices. Indeed, the recent expectations survey by the CBT showed some pick up in both 12-month and 24-month ahead inflation expectations. The immediate impact of the decision was a slight easing of the USD/TRY rate to below 1.78 while the bond market reaction was also limited with the 2y benchmark bond yield falling to 9.48% from just above 9.5%. Yesterday’s MPC decision confirmed the CBT’s rising concerns over inflation and implies it is likely to continue additional tightening as long as there is no considerable currency appreciation. We expect 2y benchmark bond yields to fall to 8% by year end as the CBT successfully engineers a soft-landing in the economy. HU Rates: The CB kept rates unchanged at 7%, as expected, at yesterday’s rate-setting meeting. However, the decision still shows how divided the MPC is: there were suggestions for both a 25bp hike and a cut but holding the base rate unchanged had an ‘overwhelming’ majority. The inflation path was revised upwards but the MPC still sees the 3% target as reachable. The greatest uncertainty in our policy rate forecast is when an agreement with the IMF/EU can be reached. At the moment, we still think monetary easing may come sometime in 2H12 but uncertainty is high with regard to the exact timing as it is highly dependent on negotiations with the IMF/EU, in our view. Traders Comments: CEE Fixed Income: As quarter end approaches, markets in our region look very subdued with only modest turnover. Hungarian local currency and Eurobond yields were down slightly but the 3 month T-Bill auction didn't go very well. The bid-cover ratio fell to 1.26 from a previous 1.7 and the yield was unchanged from the last auction on the 20th of March.For more details please go to our Comments section.

Erste Group: CEE Macro/Fixed Income Daily

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