Bond yields likely to rise significantly this year in CEE economies except Romania, says ERSTE Group

Bond yields are expected to rise significantly this year in the Central and Eastern European (CEE) countries, except that in Romania, which continues fiscal expansion. Further positive rating actions expected in Croatia, Serbia, Slovenia and Slovakia later this year. While the region has built up decent cash buffer in the first quarter of this year, debt issuance is expected to slowdown in the second quarter.

In the Czech Republic, the return from the FX commitment to a managed float will result in a gradual flattening of the CZK yield curve. The sale of bonds with shorter maturities by foreign investors will lead to upward pressure at the short end of the yield curve.

"Given that inflation has stopped growing, we do not expect any strong upward pressure on bond yields resulting from reflation trades this year. Romania is the only concern here, as strong fiscal expansion and in particular, another wave of double-digit wage increases in the public sector will bring the deficit and inflation significantly up next year. We expect about a 90bp increase in 10Y Romanian local currency bond yields in the next 12 months, while for other CEE countries the yield increases should range between 30-70 bps," ERSTE Group commented in its latest research report.

The improved economic outlook and better fiscal prospects of South-Eastern European countries have led to some positive rating actions in the last couple of months. Croatia’s rating outlook was changed from negative to neutral by Moody’s and Fitch in 1Q17 and Serbia’s rating was upgraded by Moody’s to B1 from B2.