November 26, 2018 / 3:48 PM / 7 months ago

CEE MARKETS-Hungary government bond yields fall further, Italy helps

    * Retreat of Italian yields helps volatile Hungarian bonds
    * Positioning takes the upper hand in forint, crown trade
    * Moody's keeps Hungary's rating, outlook unchanged

 (Recasts with continuing fall of Hungarian government bond
    By Sandor Peto and Alicja Ptak
    BUDAPEST/WARSAW, Nov 26 (Reuters) - Hungarian government
bond yields set new multi-month lows due to end-of-year
positioning amid expectations for slower economic growth and
fewer interest rate rises around the world, market participants
    Hungary's debt market and currency are more vulnerable to a
rise in yields elsewhere as the country's central bank is
unlikely to increase its benchmark interest rate in the coming
months, which is the lowest in Central Europe at 0.9 percent.
    Its yields have been more tightly correlated with Italian
yields, which have jumped in past months due to Rome's debate
with the European Union over Italy's budget deficit, than with
Poland's much more stable yields.
    Italy's 10-year bond yield plunged by 16 basis
points to below 3.25 percent after government sources said Italy
may reduce its budget deficit target for 2019 to appease the EU.
    Hungary's corresponding yield was fixed lower by
11 basis points at 3.26 percent, its lowest level since July,
while Poland's yield rose by one basis point to 3.1765 percent.
    The spread of the Hungarian yield over Poland was the
narrowest since July.    
    "The expectations of interest rates increases are weaker
globally and that has a positive impact on bonds," said Miroslaw
Budzicki, strategist at PKO BP, adding though that yields were
unlikely to drop before a bond auction in Warsaw on Thursday.
    In Hungary, only one bond auction is left for the year.
    Its government bonds have been also helped in the past weeks
by expectations that an inflow of European Union funds could
pick up late this year, cutting the government's funding needs.
    Traders said yields in interest rate swaps continued to fall
sharply, also pushing down government bond yields.
    The yield on 5-year swaps was bid at 1.91 percent, a 3-month
low, down four basis points.
    Hungarian yields, which have declined more than 50 basis
points since early October, dropped further even though Moody's
did not upgrade Hungary's Baa3 credit rating, nor its stable
outlook on Friday despite some expectations that it could do so.

    The forint underperformed regional peers, easing
by 0.2 percent to 322.74 against the euro by 1445 GMT, still
near its strongest levels since August. 
    Position closings ahead of the year-end after a hectic year
are increasingly driving Central European currency movements,
dealers said.    
            CEE       SNAPSHOT   AT                         
            MARKETS             1545 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.9200   25.9250    +0.02%    -1.46%
 crown      >                                       
 Hungary    <EURHUF=  322.7400  322.2000    -0.17%    -3.66%
 forint     >                                       
 Polish     <EURPLN=    4.2926    4.2901    -0.06%    -2.71%
 zloty      >                                       
 Romanian   <EURRON=    4.6595    4.6599    +0.01%    +0.43%
 leu        >                                       
 Croatian   <EURHRK=    7.4300    7.4325    +0.03%    +0.00%
 kuna       >                                       
 Serbian    <EURRSD=  118.4200  118.4200    +0.00%    +0.07%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1063.90  1062.420    +0.14%    -1.32%
 Budapest             39453.60  39379.78    +0.19%    +0.19%
 Warsaw                2214.92   2225.39    -0.47%   -10.01%
 Bucharest             8482.32   8522.78    -0.47%    +9.40%
 Ljubljana  <.SBITOP    818.39    822.42    -0.49%    +1.49%
 Zagreb                1735.61   1729.34    +0.36%    -5.82%
 Belgrade   <.BELEX1    749.38    743.29    +0.82%    -1.37%
 Sofia                  585.61    588.93    -0.56%   -13.56%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.7200    0.1520   +235bps    +15bps
   5-year   <CZ5YT=R    1.8550    0.0080   +208bps     -1bps
   10-year  <CZ10YT=    2.0980    0.0070   +174bps     -2bps
   2-year   <PL2YT=R    1.5940    0.0150   +223bps     +1bps
   5-year   <PL5YT=R    2.4600    0.0350   +268bps     +2bps
   10-year  <PL10YT=    3.1950    0.0400   +283bps     +2bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.22      2.33      2.42      2.02
 Hungary                  0.30      0.51      0.81      0.13
 Poland                   1.76      1.79      1.84      1.72
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto, Editing by David Goodman, William
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