CEE MARKETS 2-Hungary's bond yields hit record low on PMI indices

Mon Jun 2, 2014 8:38am EDT

* Forint, zloty shrug off PMI retreat, economies still recovering
    * Hungarian 3-year bond yield falls to record low
    * Yields could soar if ECB does not meet rate cut expectation -trader

    By Sandor Peto
    BUDAPEST, June 2 (Reuters) - Hungarian government bond yields plunged to
record lows on Monday, shrugging off a retreat of Polish and Hungarian
manufacturing indices, which still showed continued economic pick-up in May.
    The fall in bond yield accelerated after a survey showing Germany's
manufacturing sector expanded at its slowest pace in seven months in May
reinforced hopes for monetary easing by the European Central Bank (ECB) at a
meeting on Thursday. 
    Hungarian bond yields fell by 10-25 basis points along the curve, with 3-
and 5-year bonds leading the gains. 
    The yield on the country's 3-year benchmark bonds fell 26 basis
points to a record low of 3.12 percent, to rebound to 3.16 percent in early
afternoon trade.
    Bonds in Poland, the region's biggest economy, traded near the lowest levels
in one year, with the 10-year yield dropping 2 basis points to 3.65
percent.
    Central Europe's economic recovery and stability has helped its bonds join a
rally of lower rated euro zone debt in the past months, which got new fuel in
May from expectations for a rate cut and monetary stimulus by the ECB.
    "If the ECB does not deliver on Thursday, yields here will jump like a
compressed spring," one Budapest-based fixed income trader said.
    
    RECOVERY STILL UNDERWAY
    Hungary's Purchasing Managers' Index (PMI) dropped to 53.9 from 54.6 in
April and Poland's index fell to 50.8 from 52 in April.
    The Polish figure was the lowest in 11 months, but data above 50 still
indicates a pick-up in growth in manufacturing.
    The publisher of the index said some firms in the survey cited a fall in
their export contracts due to Ukraine's crisis and conflict with Russia.
 
    But the economic recovery which helped lift the region's assets in the past
months is seen continuing.
    Citigroup said in a note that Poland's drop in the PMI contradicted other
data, and recovery could pick up later this year, but the PMI's "recent drop
shouldn't be easily dismissed" and its weakness probably supported Polish bonds.
    "But we see a risk of eventual upward move in yields after the MPC (Polish
central bank)/ECB meetings later this week," Citi said.
    Poland's central bank is still expected to keep its 2.5 percent base rate
unchanged at its meeting on Wednesday rather than following a rate cut by
Hungary's central bank last week.
    "(But) this (weak PMI), together with still limited price pressures, will
support the accommodative stance of the CE-3 central banks (Poland, Czech and
Hungary) and increases the likelihood of a dovish shift by the Polish MPC at
this week's or - more likely - July's meeting," Goldman Sachs said in a note.
    The crown was flat after the Czech Republic, whose central bank
have been fighting deflation since late last year, reported a rise in its PMI to
57.3 in May from 56.5 in April.
    Romania's leu firmed a third of a percent versus the euro. An
International Monetary Fund mission is due to start the review of a stand-by
loan facility to Romania on Monday.
    Romania sold 5-year and 13-year bonds at an auction after low inflation and
strong market liquidity helped push its debt yields near record lows in the past
weeks. Yields dropped slightly further on Monday. 
    Slovenia's 10-year bonds reversed an early weakening. Their
yield was bid at 3.36 percent, a tick down from Friday, the lowest level since
Slovenia joined the euro in 2007.
    Slovenia's president announced snap parliamentary elections for July 13 on
Sunday, ending weeks of uncertainty since the resignation of Prime Minister
Alenka Bratusek. 
    Ljubljana's main stock index also fully recovered from an early
fall caused by an almost 5 percent fall of Telekom Slovenija shares
after the company paid dividends.        
                      CEE MARKETS SNAPSHOT AT 1334 CET
 ************************** CURRENCIES ************************
                             Latest  Previous   Daily   Change
                             bid     close      change  in 2014
 Czech crown                 27.471    27.473  +0.01%  -0.51%
 Hungarian forint           302.590   302.860  +0.09%  -1.86%
 Polish zloty                 4.137     4.137    0.00% +0.30%
 Romanian leu                 4.387     4.401  +0.33%  +1.68%
 Croatian kuna                7.574     7.582   +0.10% +0.58%
 Serbian dinar              115.500   115.460    -0.03%   -0.87%
 Note: daily change calculated from previous close at 1600 GMT
 **************************** STOCKS **************************
                             Latest  Previous   Daily   Change
                                     close      change  in 2014
 Prague                      1029.17    1027.22  +0.19% +4.28%
 Budapest                  19460.02  19264.42   +1.02%  +6.14%
 Warsaw                     2432.28   2429.51   +0.11% +1.16%
 Bucharest                  6702.53   6722.53   -0.30%  +3.47%
 ***************************** BONDS **************************
                         Yield    Yield    Spread    Daily
                         (bid)    change   vs Bund   change in
 Czech Republic                                      spread
   2-year                0.285    0.000   +22bps     0bps
   5-year                0.725     -0.030   +30bps      -3bps
  10-year                1.683    -0.033   +33bps     -3bps
 Hungary
   3-year                3.160     -0.220   +305bps    -22bps
   5-year                3.490     -0.200   +307bps    -20bps
  10-year                4.610    -0.120    +326bps    -12bps
 Poland
   2-year                2.700    -0.080    +264bps    -8bps
   5-year                3.100    -0.030    +268bps    -3bps
  10-year                3.650   -0.020    +230bps    -2bps
 ******************* FORWARD RATE AGREEMENTS ******************
                              3x6     6x9    9x12  3M interbank
 Czech Rep                    0.400   0.360  0.450   0.36
 Hungary                      2.440   2.520  2.620   2.45
 Poland                       2.660   2.645  2.650   2.72
 Note: FRA quotes are for ask prices
 **************************************************************
 
 (Additional reporting by Michal Janusz in Warsaw, Marja Novak in Ljubljana,
Radu Marinas in Bucharest; editing by Susan Thomas)
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