Romanian bond yield rises ahead of auction, bucking region

BUDAPEST: Romanian 10-year government bond yields traded at 3-month highs ahead of an auction on Thursday, bucking a retreat elsewhere in Central Europe, as worries over Bucharest's tax increases continue to weigh on Romanian markets.

The 2019 hikes, announced four weeks ago, hit the bank and energy sectors and wiped a fifth off Bucharest's stock index,  also keeping the leu under pressure over worries about the Romanian business environment.

The currency traded at 4.689 versus the euro at 0926 GMT, a touch weaker but near 7-month lows reached on Wednesday.

The Romanian central bank, which keeps the leu in a managed float regime, probably intervened in the market "to smooth the speed of the Romanian leu's weakening, rather than stop/reverse it," ING analysts said in a note.

"The usual spike in turnover ahead of local fixing seems to confirm that the NBR remains hands on," they said.

The analysts added that the government could cut its 10-year bond auction on Thursday, allocating papers at the top end of secondary market yields around 5.05 percent.

Romanian 10-year papers were quoted around 5.06 percent, their highest level since Oct. 8.

A sharp decline in inflation in the region in the past months, and a fall in US yields, prompted a plunge in bond yields in Central Europe, including Romania, late last year.

The decline in Hungary and Poland continued this year, but Romanian bond prices have given up all of their gains.

On Thursday, Hungary and Poland's long-term yields dropped slightly, following a jump on Wednesday tracking a more moderate rise in core market yields after British Prime Minister Theresa May's European Union exit deal was rejected by parliament.

Hungary's second government bond auction this year could draw healthy demand on Thursday, a Budapest-based trader said.

"This is the last auction of the (10-year) 27/A bonds, and I expect good interest...There was good demand at the last auction for that bond, too," the trader said.

The bonds traded at 2.77 percent in the secondary market, a touch lower from Wednesday's fixing.

The forint and the zloty eased 0.1 percent versus the euro following a surge on Wednesday after Hungarian central bank Deputy Governor Marton Nagy said monetary tightening could start if core inflation rises to 3 percent.

The forint was trading at 321.7.

"After a 3-forint firming in the exchange rate, today's slight correction is natural," a dealer said, adding that 321.3 remained a strong resistance level.