BUDAPEST: Central European government bonds rebounded on Tuesday as crude oil prices offered relief to debt markets, although Romanian bonds remained under pressure after leftists won a parliamentary election on the weekend.
Long-dated bonds firmed more than short maturities, flattening the yield curve somewhat after higher oil prices had put the emphasis back on inflation in a week when the US Federal reserve is tipped to raise interet rates.
Poland's 10-year bond yield dropped 5 basis points to 3.58 percent by 0928 GMT.
Hungary's corresponding yield fell 4 basis points to 3.33 percent.
The yield on Romania's 10-year bonds, however, rose 2 basis points, bid at 3.63 percent. Short-dated Romanian yields also rose by a few basis points and the leu eased 0.1 percent to 4.5075 against the euro.
Romanian assets are likely to remain under pressure due to investor concerns the Social Democrat Party (PSD), which won Sunday's election, will hike wages and cut taxes, and send the budget deficit above the European Union's ceiling next year.
"We reiterate our relative value trade recommendation to prefer Hungarian versus Romanian longer-term debt instruments," Raiffeisen analyst Stephan Imre said in a note.
In focus this week is the Federal Reserve's two-day meeting that will end on Wednesday.
"The expectation is a rate hike, and the real question is how hawkish the Fed's comments will become," one Budapest-based fixed income trader said.
Higher US interest rates make assets in emerging markets including Central Europe relatively less attractive and a firming of the dollar often has the same effect.
Regional equities rose and Warsaw's index outperformed. It gained 1.1 percent, driven by financial sector stocks, mainly Pekao bank which firmed 1.5 percent.
Sentiment towards bank stocks in Europe improved in choppy trading after Italy's largest bank, UniCredit, unveiled plans to raise 13 billion euros to shore up its balance sheet.
The plans include selling profitable foreign business including its Polish unit Pekao.
Standard & Poor's raised the outlook on Pekao's long-term credit ratings to stable from negative on Monday, reflecting a similar change on Poland's sovereign rating outlook.
Bucharest's main stock index, rising 0.4 percent, hit a 2-month high.
Analysts have said the Romanian bourse's prospects hinged on whether the new government pursues plans to list minority stakes in state-owned energy and transport firms.
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