October 19, 2018 / 1:20 PM / a year ago

UPDATE 1-CEE MARKETS-Italy worry erases Polish bonds' post-upgrade gain

    * Poland leads bond yields rise on Italy-EU clashes over
    * Risks including China's economic slowdown weigh on
    * Polish retail sales lose pace, pointing to economic
    * Ruling party strength watched at Sunday's Polish local

 (Recasts with Polish bond yield increase, new comments)
    By Sandor Peto
    BUDAPEST, Oct 19 (Reuters) - Poland led a rise in Central
European government bond yields on Friday as Italy's dispute
with the European Union over its plan for higher budget deficits
also boosted debt yields in the euro zone, with which the
region's economies are tightly integrated. 
    Italian bond yields hit four-year highs after the EU
crticised Rome's draft budget. 
    A 6 basis point rise in Poland's 10-year yield
to 3.27 percent erased all the price gains the bonds posted
since Standard & Poor's improved the country's rating to 'A-" a
week ago.
    The upgrade brought the rating level back to where it was
before a shock downgrade in early 2016 due to the initial
measures of the government led by the conservative PiS party.
    S&P cited the robustly growing Polish economy, but its move
surprised some investors who had believed that Warsaw's dispute 
with the European Commission over the rule of law in Poland
would block an upgrade.
    Hungary's 10-year yield was fixed higher by 5 basis points
at 3.78 percent.        
    "This is partly Italy, and also positions are rearranged
ahead of the long week-end (due to Hungary's Oct. 23 national
holiday)," one Budapest-based fixed income trader said.
    Polish bonds underperformed Hungarian peers which got a bad
beating from a sell-off in emerging markets earlier this month
when the U.S. 10-year Treasury yield surged to 7-year highs.
    "(Friday's Polish yield rise) looks like a delayed reaction
on global factors, including Italy, of course," Bank Pekao
analyst Arkadiusz Urbanski said. 
    "(Polish bonds) remained stable, when core markets
weakened," he said, adding that fresh supply at a Polish bond
auction next week would arrive in an uncertain international
    Citi Group recommended that investors should underweight
Hungarian bonds because they are vulnerable to yield rises in
the United States and Italy.
    "For EM (emerging markets) a lot is riding on whether the
China (economic) stimulus is sufficient," Citi analysts said.
    In Poland, September data showed a drop in the annual growth
in retail sales rate to 5.6 percent from 9 percent in August.
    The figures confirmed that the economy is slowing, and
underpinned expectations that the Polish central bank would keep
interest rates at record lows in the coming quarters.
    Poland will hold the first round of local elections on
Sunday. The fight for big cities including Warsaw is a key test
to the ruling nationalist PiS party's support ahead of European
Parliament and national elections next year.            
    The results are unlikely to affect markets seriously, senior
economist of Credit Agricole in Poland, Warsaw-based analysts
including Credit Agricole's Krystian Jaworski said.
    "However, shall the voting reveal that there could be no
clear winner of the 2019 parliamentary elections, the market
could start pricing the political risk," said Marcin Sulewski,
economist of Santander bank.     
            CEE       SNAPSHOT   AT                         
            MARKETS             1502 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8670   25.8850    +0.07%    -1.26%
 crown      >                                       
 Hungary    <EURHUF=  323.4200  323.4000    -0.01%    -3.87%
 forint     >                                       
 Polish     <EURPLN=    4.3060    4.3075    +0.03%    -3.01%
 zloty      >                                       
 Romanian   <EURRON=    4.6675    4.6705    +0.06%    +0.26%
 leu        >                                       
 Croatian   <EURHRK=    7.4310    7.4203    -0.14%    -0.01%
 kuna       >                                       
 Serbian    <EURRSD=  118.5500  118.6600    +0.09%    -0.04%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1081.28  1087.100    -0.54%    +0.29%
 Budapest             37078.65  37485.01    -1.08%    -5.84%
 Warsaw                2180.37   2188.10    -0.35%   -11.41%
 Bucharest             8594.12   8599.66    -0.06%   +10.84%
 Ljubljana  <.SBITOP    812.28    813.23    -0.12%    +0.73%
 Zagreb                1767.27   1776.23    -0.50%    -4.10%
 Belgrade   <.BELEX1    738.95    743.92    -0.67%    -2.74%
 Sofia                  608.05    608.16    -0.02%   -10.24%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6000    0.0490   +225bps     +5bps
   5-year   <CZ5YT=R    1.8510    0.0010   +203bps     +1bps
   10-year  <CZ10YT=    2.1580   -0.0160   +175bps     -1bps
   2-year   <PL2YT=R    1.5790    0.0150   +223bps     +2bps
   5-year   <PL5YT=R    2.5470    0.0440   +273bps     +6bps
   10-year  <PL10YT=    3.2740    0.0910   +286bps    +10bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.05      2.23      2.37      1.76
 Hungary                  0.40      0.68      1.03      0.16
 Poland                   1.78      1.80      1.89      1.72
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto, editing by Ed Osmond and Angus
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