BUDAPEST: Central European government bonds firmed and Budapest stocks set a new record high on Friday as global markets calmed down after jitters caused by Wednesday's hawkish Federal Reserve comments.
The Fed signalled faster interest rate hikes which would reduce the appeal of high-yielding emerging market assets.
Sentiment improved as the dollar retreated from Thursday's 14-year highs against the euro and the US 10-year Treasury yield dropped from its highest levels since 2014.
The forint led a firming of Central European currencies, gaining 0.2 percent against the euro.
Polish and Hungarian government bonds have almost fully recovered from the Fed shock.
Poland's 10-year bonds traded at a yield of 3.43 percent, off Thursday's 3.59 percent peak, with the yield curve flattening.
Hungarian yields dropped by about 4 basis points along the curve. The 10-year yield traded at 3.33 percent.
The Polish yield is still higher by 40 basis points and the Hungarian yield by 20 basis points from levels before the victory of Donald Trump at US presidential elections last month lifted inflation expectations there and debt yields in the world.
"Hedge funds have still not been able to scare real money investors out of the long positions they manage, and yields are again edging down," one Budapest-based fixed income trader said.
Foreign investors have reduced their Hungarian bond holdings by 260 billion forints ($870.82 million)since October to 3.49 trillion forints.
But liquidity-boosting measures by the Hungarian central bank have lifted demand from local players, and short-term market yields were near record lows.
Hungarian equities have shrugged off the week's global jitters, supported by three credit rating upgrades this year, and good fundamentals of blue-chip companies.
Budapest's main stock index set the fourth daily record high in a row, rising half a percent.
Romanian bonds continued to lag behind European peers and bids for their yields edged up, although the leu traded slightly off 5-month lows against the euro.
Romania rejected all bids at a bond auction on Thursday after there was no progress since Sunday's elections towards forming a new government.
President Klaus Iohannis has suggested he will not accept the election winner, Social Democrat leader Liviu Dragnea, as prime minister.
Worries remain that the budget deficit will overshoot next year.
The cost of insuring Romanian government debt against default hit a 4-1/2-month high.
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