CEE corporate bond rally
|CEE risk premium falling continuously since 4Q22
CEE corporate bonds are in demand again
As the spread development for CEE EUR corporate bonds shows (on average), sentiment towards EUR corporate bonds from CEE has improved significantly over the last one and a half years. However, risks remain. This is because some issuers are still sourcing oil & gas from Russia or are benefiting from the transmission as pipeline operators. However, the issuers concerned are increasingly better prepared for an end to supplies.
Outbreak of Ukraine war burdens CEE corporate bonds
While the outbreak of the coronavirus pandemic made little difference to the relative valuation of corporate bonds from the CEE region compared to the broad market as a whole, the outbreak of the war in Ukraine put corporate bonds from the CEE region under strong pressure. While the spread premium of CEE EUR corporate bonds over the broad EUR corporate bond market as a whole was still 15 basis points (bp) on average as of December 31, 2021, it widened significantly to 196bp by March 31, 2022, following the outbreak of the war in Ukraine on February 24, 2022.
The CEE "risk premium" peaked (~270bp) in autumn 2022 and has since been steadily approaching the level seen before the outbreak of war in Ukraine. It currently stands at around 60bp. If the war does not escalate and CEE countries such as Hungary manage to become less dependent on Russian oil & gas supplies as planned, there is spread tightening potential. Poland, for example, is already independent of Russian oil & gas imports.
At BBB, the average rating of CEE issuers is somewhat weaker than the average rating on the EUR IG corporate bond market as a whole (A-BBB). On the other hand, the modified duration of bonds on the overall market is higher on average at 4.9 years than in CEE (3.4 years).
Rally is entirely justified
The recent strong performance of CEE corporate bonds is underpinned by fundamentals. The CEE issuers, which are primarily from the utilities and oil & gas sectors, have good credit ratios in a peer comparison. Dependence on Russia is gradually being reduced. Incidentally, the recent escalation in the Middle East conflict did not lead to an increase in the CEE spread "pickup".
Many governments in the CEE region hold shares in issuers that are important for the state energy infrastructure. This usually supports their credit quality indirectly. For example, the Czech government holds 70% of the shares in the utility CEZ, which accounts for around 30% of the CEE EUR IG corporate bond volume. For the members and weightings of the EUR IG Corporate Bond universe in CEE analyzed here, please refer to the appendix.
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