BUDAPEST/WARSAW: Government bonds rebounded in Warsaw on Wednesday as an auction drew solid demand amid signs of an easing of a constitutional standoff with Brussels.
Poland's 10-year government bond yield had earlier touched a 3-week high at 3.119 percent amid expectations of a US Federal Reserve interest rate hike that weighed on debt markets across central Europe.
But analysts said demand was higher than expected when the finance ministry offered 2-4 billion zlotys worth of bonds at the auction.
"The market is taking a breath after European Commision officials' meeting with Polish PM (Beata Szydlo on Tuesday). This was visible on the zloty yesterday," Pekao analyst Arkadiusz Urbanski, said.
The zloty was flat at 4.4275 against the euro at 1022 GMT, still close to Tuesday's 3-and-1/2-month lows at 4.4575.
It started to recover after Commission Vice President Frans Timmermans met Szydlo and gave Poland more time to resolve concerns over changes to the constitutional court that critics say have weakened the tribunal.
A senior member of Poland's ruling Law and Justice party (PiS) signalled on Wednesday it was ready to give some ground to ease the standoff, though his leader kept up his invective against Europe in the local press.
Polish government bond yields dropped after the auction, with their curve flattening. The 10-year yield fell 6 basis points to 3.057 percent.
But Polish central bank rate setter Grazyna Ancyparowicz warned in an interview with Reuters that the constitutional crisis was still "very harmful" to the economy.
Elsewhere in Central Europe, the forint firmed 0.2 percent to 314.72 after Hungary's central bank reduced its base rate by 15 basis point to 0.9 percent as expected on Tuesday, but ended its rate cut cycle.
Hungarian government bond prices, however, retreated. Yields rose by about 5 basis points from Tuesday's fixing and the 10-year paper traded at a yield of 3.38 percent.
Traders said regional markets would remain under pressure from strengthening expectations for a Federal Reserve interest rate hike in June or July and concerns that Britain may vote to leave the European Union in a June referendum.
Millennium bank analysts said in a note that they saw the zloty's rise as a "short-term rebound".
Hungarian bonds can get a boost if Moody's upgrades the country's credit rating from 'junk' in July, after Hungary received its first investment grade rating since 2012 from Fitch last week.
"But that date is still far away," one Budapest-based fixed income trader said.
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