October 18, 2018 / 10:02 AM / 10 months ago

CEE MARKETS-Hungarian bond yields continue to retreat after recent rise

    * Hungarian bonds resist pull of U.S. and European yield
    * Hungarian yield fall is correction of rally -analysts
    * Romania's bond auction seen drawing healthy demand

    By Sandor Peto
    BUDAPEST, Oct 18 (Reuters) - Hungarian government bond
yields continued to ease on Thursday, but levels remained
relatively elevated, attracting investors despite a rise in
yields in Europe and the United States.
    A rapid rise in yields in recent weeks has encouraged
foreign investors to enter Central Europe's most volatile bond
market, traders and analysts said. 
    Hungarian yields dropped 1-3 basis points along the curve on
Thursday, with 10-year paper trading at 3.73 percent
as buyers continued to step in. 
    That was only 1 basis point lower from Wednesday, but in the
previous session the yield fell 20 basis points, while yields
were rising in developed markets and in other Central European
    Ten-year yields in Germany and Poland were 2
basis points higher at 0.48 and 3.21 percent respectively on
    Earlier this month the yield on Hungary's 10-year bond rose
around 40 basis points as inflation worries, coupled with the
lowest short-term interest rates in the European Union's eastern
wing, made long-term paper vulnerable.
    "After the rise in the yield to near 4 percent, it has
become attractive, and buyers arrived, mainly from abroad," said
Gergely Palffy, a Budapest-based analyst at Raiffeisen.
    "The 4 percent level could be approached again later this
year, and that could trigger inflows from abroad," he added.
    The forint-denominated bond holdings of foreign investors
 remains near its highest levels since 2015.
    Recent comments from government's debt management agency and
central bank officials about a desire to channel more retail
savings into the government bond market may have contributed to
the retreat of domestic yields, one Budapest-based trader said.
    A rise in Hungary's annual inflation to 3.6 percent in
September, the highest since early 2013, kept attention focused
on price developments amid worries that the central bank may not
act in time to rein in inflation.
    In neighbouring Romania, a rise in inflation to above 5
percent by the middle of this year has also boosted government
bond yields. 
    As inflation is expected to retreat in coming months, 3-year
Romanian bonds offered at an auction on Thursday should attract
sufficient demand, Raiffeisen analyst Stephan Imre said.
    "(Romanian government bonds) come out good on our real yield
measures in the short to medium term," he said in a note.
    "We nevertheless reiterate looming fiscal risks that should
finally increase the pressure on the central bank to recommence
rate hikes in 2019," he added.     
            CEE       SNAPSHOT   AT                         
            MARKETS             1114 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8400   25.8470    +0.03%    -1.15%
 crown      >                                       
 Hungary    <EURHUF=  322.0000  322.0800    +0.02%    -3.44%
 forint     >                                       
 Polish     <EURPLN=    4.2967    4.2890    -0.18%    -2.80%
 zloty      >                                       
 Romanian   <EURRON=    4.6661    4.6655    -0.01%    +0.29%
 leu        >                                       
 Croatian   <EURHRK=    7.4185    7.4160    -0.03%    +0.16%
 kuna       >                                       
 Serbian    <EURRSD=  118.4900  118.4000    -0.08%    +0.01%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1090.22  1087.860    +0.22%    +1.12%
 Budapest             37392.15  37399.11    -0.02%    -5.04%
 Warsaw                2200.62   2199.53    +0.05%   -10.59%
 Bucharest             8636.51   8670.30    -0.39%   +11.39%
 Ljubljana  <.SBITOP    814.81    813.42    +0.17%    +1.05%
 Zagreb                1780.63   1778.05    +0.15%    -3.38%
 Belgrade   <.BELEX1    743.10    735.33    +1.06%    -2.20%
 Sofia                  611.87    610.26    +0.26%    -9.68%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6030    0.0740   +221bps     +8bps
   5-year   <CZ5YT=R    1.8500   -0.0020   +197bps     -1bps
   10-year  <CZ10YT=    2.1650    0.0020   +169bps     -1bps
   2-year   <PL2YT=R    1.5720    0.0030   +218bps     +1bps
   5-year   <PL5YT=R    2.5180    0.0060   +264bps     +0bps
   10-year  <PL10YT=    3.2280    0.0400   +275bps     +3bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.05      2.24      2.37      1.76
 Hungary                  0.43      0.67      1.10      0.16
 Poland                   1.78      1.80      1.86      1.72
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto; Editing by Kirsten Donovan)
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