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Bonds retreat as CPI rises, crown cap speculation watched

Bonds retreat as CPI rises, crown cap speculation watched

WARSAW: Government bond yields mostly rose in Central Europe as figures released in Hungary and Romania on Friday underpinned that inflation is rising across the region. Ultra low Czech bond yields also rebounded after robust buying amid speculation of a surge in the crown later this year, which some investors fear has been overdone. Hungary’s annual inflation jumped to 1.8 percent in December. Romania’s figure also rose. Even though it remained in the negative at -0.5 percent, the new government continues to loosen the budget, which is expected to push up inflation. Romanian short-term government bond yields rose, with the 5-year paper bid at 2.6 percent, up 11 basis points, and Hungary’s corresponding yield rose 5 basis points to 1.9 percent.

Romanian core inflation remained surprisingly subdued, ING analysts in Bucharest said in a note, but “the outlook for 2017 remains marked by uncertainties, mostly related to the fiscal outlook”. Analysts said central banks in the region could keep their policies loose as inflation is still at the low end of their target ranges or below it. Hungary’s central bank could soon drop from its statement the willingness to use non-conventional tools to ease policies further, “but we do not expect a tightening of conditions yet,” Takarekbank analysts said in a note.

Pressure on the region’s long-term bonds has eased in the past weeks as U.S. Treasury yields and the dollar retreated. But signs that the European Central Bank may further taper its asset buying programme, a flight of labour to richer Western countries and fiscal policy loosening in the region pose risks, analysts said. The 10-year Czech bond yield rose 7 basis points to 0.446 percent, but the 2-year yield was flat at -1.268 percent, 55 basis points below the corresponding safe-haven Bund yield. Czech markets have become a bonanza of speculation due to expectations that in the middle of 2017 the central bank will abandon its cap, which has kept the crown weaker than 27 against the euro for years, and the currency could surge. “There was a bit of panic, especially on Wednesday. So volumes (so far this year) can be huge,” one Prague-based dealer said. A huge amount of euro selling positions against the crown has accumulated, and is growing further, making hard to predict how the Czech currency will move later this year, ING analysts said in a note.