Central European government bond prices eased on Friday as investors paused after a rally fuelled partly by expectations of monetary easing by the European Central Bank next week. Hungarian bond yields rose by 4-8 basis points from record lows hit on Thursday, when a sale of bonds of between three and 10 years drew strong demand. Polish yields rebounded from their lowest levels in one year, rising 3-7 basis points.
Central European bond markets have rallied recently in tandem with lower-rated debt in the euro zone, driven by an expectation that the ECB will ease monetary policy significantly at its June 5 meeting. "There is some profit taking before the ECB and (the June 3) Polish central bank meetings. I don't expect too much pressure after these events though, the sentiment is still very strong," said a Warsaw-based dealer.
A Budapest-based fixed income trader disagreed, however. "Domestic factors will be unable to reverse the tide if there is a profit-taking wave in international markets after the ECB meeting," one Budapest-based fixed income trader said. Others said only a few investors managed to buy bonds at Thursday's Hungarian auctions, meaning many traders still hold short positions that they would like to close.
A second trader in Budapest said new measures to be introduced by the National Bank of Hungary (NBH) "may force banks... to buy bonds in the 3- to 5-year segment in the coming weeks." Hungary's central bank's two-week bills will cease to exist in August and foreign banks will not be allowed to place funds with the two-week deposits that will replace the bills. The central bank expects banks to channel at least part of the funds now parked in two-week central bank bills into government debt. "The introduction of the NBH IRS (interest rate swap) facility from June 16 may narrow asset swap spreads and provide further support up to the 5-year tenor of the curve," Eszter Gargyan, analyst of Citigroup said.
On Friday the yield on Hungary's three-year benchmark bonds rose 4 basis points to 3.38 percent and the five-year yield by 3 basis points to 3.65 percent. Polish government bond yields rose from one-year lows reached on Thursday. The country's 10-year yield rose 7 basis points to 3.69 percent. Junk-rated Hungary's debt has also been supported by some expectations that its credit rating could improve later this year. Fitch is due to review Hungary's rating on June 6, Moody's on July 4 and Standard & Poor's on September 19.
Several central banks in the region have cut rates to record lows and most of them have finished rate easing, although Hungary's central bank, which cut its base rate to 2.4 percent this week, has not signalled yet that rates have reached the bottom. The Polish central bank is expected to keep rates on hold at a record low of 2.5 percent next week. Poland revised annual economic growth in the first quarter to 3.4 percent from 3.3 percent on Friday. The data showed that domestic demand drove growth, and a double-digit rise in investments signalled that the momentum could be lasting.
"The growth dynamics and strengthening domestic demand are the main arguments for the MPC (central bank) to hold off with further monetary easing, despite the very low inflation rate," Erste analyst Katarzyna Rzentarzewska said in a note. "Any signs of a slowdown may open the discussion on a rate cut," she added. An economic pick-up and relative stability in the region has buoyed its assets in the past months.
However Slovenia is in political turmoil since the resignation of its prime minister earlier this month but its bonds have been buoyed by bullish sentiment relating to euro zone debt markets and data showing a 1.9 percent annual rise in the country's economic output in the first quarter. That country's 10-year bond yield dropped further on Friday, to hit its lowest since the country joined the euro in 2007 - 3.352 percent from 3.382 percent on Thursday. Neighbouring Croatia reported 0.4 percent fall for the same period. Its 10-year yield was flat at 4.834 percent.
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