BUDAPEST: Central European government bond yields rose on Friday as Italy's dispute with the European Union over its increased budget deficit targets fuelled a rise in euro zone yields.
Italian bond yields hit four-year highs after the EU slammed Rome's draft budget. Investors bought safe German Bunds instead of bonds in the euro zone, with which Central European economies are tightly integrated.
A drop in regional equities prices also reflected risk aversion, with worries over China's economic slowdown weighing on nerves despite some rebound in regional currencies.
Citi Group recommended that investors should underweight Hungarian bonds because they are vulnerable to yield rises in the United States and Italy.
"For EM (emerging markets) a lot is riding on whether the China stimulus is sufficient," Citi analysts said.
Hungarian bond yields rose 3-4 basis points along the curve, with 10-year papers trading at 3.8 percent.
"This is partly Italy, and also positions are rearranged ahead of the long week-end (due to Hungary's Oct. 23 national holiday)," one Budapest-based fixed income trader said.
"But Polish yields are also up, even though they do not even have a long week-end," the trader added.
Poland's 10-year yield rose 8 basis points to 3.28 percent, even though the corresponding Bund yield which it often tracks was lower by 1 basis point at 0.41 percent.
Polish yields rose, and along with other Central European units, the zloty firmed slightly, tracking a mild rebound in the MSCI emerging market currency index, even though Poland released weaker-than-expected retail sale growth data.
The September figures showed a drop in the annual growth rate to 5.6 percent from 9 percent in August.
"(That) is another disappointment this week after weaker than expected growth of industry and somewhat disappointing labor market data," Erste analyst Katarzyna Rzentarzewska said.
"Such development fits into the picture of upcoming moderation of growth confirming that economy reached the peak in 1H18," she added.
Dovish Polish rate setter Jerzy Zyzynski was quoted by the PAP news agency on Thursday as saying that high real interest rates may even point towards cutting rather than increasing Polish central bank interest rates.
Poland will hold the first round of local elections on Sunday, and the fight for big cities including Warsaw is a key test to the ruling nationalist PiS party's support ahead of European Parliament and national elections next year.
The results of the vote are unlikely to affect markets seriously, senior economist of Credit Agricole in Poland, Krystian Jaworski said.
"Unless we see a drastic discrepancy compared to the polls, which may somehow shift the market perception regarding the results of the parliamentary (elections)," he added.
According to an opinion poll quoted by the tabloid Super Express, PiS is supported by 34 percent of Poles, while its arch-rival centrist Civic Platform (PO) acting in a coalition with liberal Nowoczesna party had 24 percent support.
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