CEE Macroeconomic and Fixed Income Research

Analysts’ View:

HU Rating: Fitch ratings told the press yesterday that it will likely keep the rating of Hungary unchanged in the near term. Hungary is currently rated at BB+ with a stable outlook (one notch below investment grade). Fitch is scheduled to officially make an announcement of the rating on 22 May, but yesterday’s comments suggest that the rating and the outlook is more likely to remain unchanged. With regards to the fundamentals, Fitch told journalists that it sees the improvement in the external balance (fuelled by private sector deleveraging and the current account surplus) as a positive factor for the rating. Fitch also said that Hungary is likely to keep the fiscal shortfall under 3% of GDP in the longer run. However, the rating agency also mentioned that the actual public debt to GDP ratio (around 77%) is well above the average of BB+ countries in Fitch’s rating pool (40%). Unsurprisingly, the unpredictable regulatory environment was also mentioned but Fitch expressed its hopes that the recent agreement by the government with the EBRD can bring regulation in the banking sector back in line with international best practice. The government just needs to give more tangible evidence that a more stable business environment is to be expected, Fitch said. We continue to think that the most likely timing for a rating upgrade back to investment grade is the first half of 2016. We see 10Y yields at 2.8% at the end of this year, but risks are to the upside for this forecast.

Traders’ Comments:

CEE Fixed income: Germany failed to attract enough bids to meet its EUR 4 bn auction target in yesterday’s OBL 0% 2/2020 primary market placement and the Bund led bond markets lower across the Eurozone, pulling up yields in CEE along with them. It’s difficult to ascertain what exactly drove the sell-off ahead of the FOMC meeting but whatever it was it serves to underline how fickle fixed income markets can be now that secondary market liquidity has dried up in the wake of QE. As far as the FOMC is concerned, the Fed acknowledged the recent weakness in the US recovery which prompted markets to push back expectations of interest rate rises but also noted that the slowing in growth reflects transitory factors i.e. a rate hike is still firmly on the table. Following an encouraging pick-up in growth of Eurozone M1 (which is deemed to be one of the best leading indicators of the Eurozone business cycle) to 10% YoY last month, the Riksbank unexpectedly held rates steady yesterday and the BoJ refrained from adding stimulus this morning whilst it also seems as if Sunday could finally bring clarity with regard to Greece. Put those factors together and historically low bond yields do not look attractive.
Within our region, this impacts HGBs the most as the upward pressure on EURHUF manifests itself since hitting a low of 295 in mid-April.