BUDAPEST: Hungarian government bonds regained ground on Wednesday after the central bank (NBH) informed banks' treasuries about planned changes to its new interest rate swap (IRS) facility.
The first of the NBH's bi-weekly 5-year and 10-year IRS auctions, held last Thursday, led to a sharp rebound in IRS and government bond yields in the market because the offered amounts and yield spreads disappointed some investors.
Banking sources told Reuters the NBH planned to make the tenders fixed-rate instead of variable-rate and link allocations to the size of bidders' assets.
Hungarian government bond yields returned to Tuesday's fixing levels after an initial 2-3 basis point rise.
The yield on 10-year bonds was flat at 2.1 percent at 1335 GMT, while the corresponding Polish yield rose 2 basis points to 3.35 percent.
Traders said it remained to be seen whether the new tender rules could trigger a fresh yield decline similar to the easing seen before Thursday's tender. The central bank said it would make a decision about changes to the IRS within days.
The fixed rates for the tender will be published only later. It is also uncertain what guidance the European Central Bank will give to markets at its meeting on Thursday.
Talk of an early rise in ECB rates could push yields higher in the euro zone and Central Europe, traders said.
"I do not think that the new IRS rules caused the retreat in (Hungarian) yields," one Budapest-based fixed income trader said. "Local funds, who were not involved in the earlier IRS-driven positioning, found bonds attractive after the yield rise," the trader added.
Hungarian stocks led a regional retreat, mirroring their Asian and Western European counterparts, after Budapest and Warsaw indexes hit record highs.
Hungary's OTP, a key driver of the earlier rally, shed 2.3 percent, while Budapest's main stock index fell 1.1 percent. Warsaw's all-share index fell 0.5 percent.
In currency markets, the zloty gained 0.2 percent and the forint 0.3 percent against the euro, benefiting from a dollar sell-off.
The zloty hit a three-year high against the greenback, just like the euro.
The Czech crown was marginally weaker against the euro, after it approached five-year highs on Tuesday.
It received some support from comments by Czech central banker Marek Mora who said positive data from local and European economies warranted a 25 basis point interest rate hike at the bank's meeting next week.
Czech President Milos Zeman on Wednesday asked Prime Minister Andrej Babis for a second time to try to form a new government after his minority administration lost a confidence vote in parliament last week.
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