BUDAPEST: Hungarian government bond yields fell to their mid-year levels on Tuesday as inflation concerns receded in Central Europe and fears of a global economic slowdown crept back.
The region's main equities markets, tracking Asian and Western European peers, gave back part of the ground gained on Monday due to relief over a truce in the US-China trade war.
Regional currencies failed to benefit from a selling of the dollar, breaking a typical correlation of 2018, even though the zloty briefly touched a 2-month high against the euro at 4.2749 in early trade.
"There are economic growth fears (globally)," one Budapest-based fixed income trader said.
"We track core markets... and the US market (long-term Treasury yields) are already pricing in future rate cuts there," the trader said.
Hungarian government bond yields, after some rebound on Monday, fell again.
They shed 5-8 basis points, with the 10-year paper trading at its lowest levels since early June, at 3.1 percent.
It almost closed a gap with better-rated Poland, even though the corresponding Polish yield dipped 2-3 basis points, briefly dipping below the 3-percent psychological line.
Monday's PMI manufacturing indices in the region fell, fuelling expectations that its robustly growing economies will soon follow a slowdown in Western export markets.
Figures released on Tuesday in the region showed a stronger than expected 6 percent annual rise in Czech gross wages and a rise in Romania's annual producer price index to 6.3 percent in October from 5.6 percent in September.
But a decline in global crude oil prices has helped dampen inflation fears in the region, fuelling a decline in government bond yields, market participants said.
That cuts the immediate pressure on central banks to tighten policy, but regional currencies remain relatively strong as the dollar buying seen earlier this year does not continue, market participants said.
Seasonal factors also help, Santander Bank analysts said.
"This month is statistically positive for the zloty. In the last 19 years, EURPLN rose in the final month of the year only five times, last time in 2014," they said in a note.
Looking ahead, an inversion in parts of the US Treasury yield curve can cause a headache if worries arise that regional interest rates will be too low to track a reversal in US rates years from now.
"That could cause worries in emerging markets, but that is a too far prospect to open positions on," the Budapest trader said. "It is not carved in stone that the US curve will become inverted. True, it looks quite strange at the moment."
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