May 22, 2018 / 10:02 AM / a year ago

CEE MARKETS-Forint rebounds, eyes on for yield surge

    * Forint off 23-month lows, bond market remains tense
    * Hungarian central bank seen keeping rates on hold
    * Possible cbank comments on Hungarian yield rally awaited

    By Sandor Peto
    BUDAPEST, May 22 (Reuters) - The forint rebounded from
23-month lows on Tuesday and investors waited to see if later in
the session the National Bank of Hungary (NBH) would address a
recent surge in government bond yields, though it was expected
to keep rates unchanged.
    The forint firmed 0.6 percent 316.55 against the
euro by 0822 GMT, after hitting its weakest level in almost two
years at 319.49 on Monday, when domestic markets were closed.
    The NBH is still in "a difficult situation" as global
markets remain shaky, and will need to communicate cautiously to
prevent unwanted speculative flows through the forint market,
one Budapest-based foreign currency dealer said.
    "If they say anything, they are more likely to talk about
the bond market... Stirring the forint market could be
dangerous," the dealer added.
     The NBH is expected to keep rates steady at its meeting on
Tuesday, in keeping with expectations for this year and next. It
is due to publish its interest rate decision at 1200 GMT. 

    But investors are particularly interested in whether the
bank has anything to say about the surge in long-terms yields
which shattered a main NBH goal to keep its spreads over core
market yields stable, traders and analysts said.
    Hungarian bonds outperformed most regional peers in the last
two years, with yields falling below those of Poland, which has
better credit ratings. This has made them more vulnerable to a
rise in U.S. interest rates. 
    In recent weeks Hungarian bonds have been the hardest hit in
Central Europe by a sell-off in emerging market assets in the
past weeks amid rallies in the dollar and the 10-year U.S.
Treasury yield.
    Hungary's 10-year bond yield has risen by about 60 basis
points this month, compared to the Polish yield's rise of about
20 basis point. The corresponding U.S. yield rose by around 30
basis points.
    On Tuesday the 10-year Hungarian paper traded at a steady
3.18 percent yield in morning trade, off an early high of 3.23
percent, while Poland's yield dropped 5 basis points from their
last close to 3.27 percent.
    "If they do not say anything, that has a message, too,"
another Budapest-based dealer said, adding that a further rise
in yields may lead to a drying up of the secondary market within
days as a lack of buyers has caused bid/ask spreads to widen.
    "The success of 3-4 years (in pushing down yields) just
should not get wiped out so easily," the trader added. 
    In currency markets, the zloty -- the
other most liquid currency in the region along with the forint
-- got a bigger beating than the Hungarian unit from this
month's sell-off in emerging markets.
            CEE       SNAPSHOT   AT                         
            MARKETS             1022 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.6600   25.7200    +0.23%    -0.46%
 crown      >                                       
 Hungary    <EURHUF=  316.5500  318.5900    +0.64%    -1.78%
 forint     >                                       
 Polish     <EURPLN=    4.2762    4.2950    +0.44%    -2.34%
 zloty      >                                       
 Romanian   <EURRON=    4.6240    4.6225    -0.03%    +1.20%
 leu        >                                       
 Croatian   <EURHRK=    7.3860    7.3830    -0.04%    +0.60%
 kuna       >                                       
 Serbian    <EURRSD=  118.0200  118.1000    +0.07%    +0.41%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1105.09  1102.150    +0.27%    +2.50%
 Budapest             36858.22  36770.93    +0.24%    -6.40%
 Warsaw                2261.63   2268.39    -0.30%    -8.11%
 Bucharest             8402.99   8260.86    +1.72%    +8.37%
 Ljubljana  <.SBITOP    893.04    897.75    -0.52%   +10.75%
 Zagreb                1855.63   1849.34    +0.34%    +0.69%
 Belgrade   <.BELEX1    744.41    744.23    +0.02%    -2.03%
 Sofia                  648.37    646.24    +0.33%    -4.29%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    0.9650    0.0930   +156bps     +9bps
   5-year   <CZ5YT=R    1.4220    0.0220   +149bps     -2bps
   10-year  <CZ10YT=    1.9570    0.0000   +139bps     -5bps
   2-year   <PL2YT=R    1.6140   -0.0130   +220bps     -2bps
   5-year   <PL5YT=R    2.5370   -0.0440   +260bps     -9bps
   10-year  <PL10YT=    3.2640   -0.0630   +269bps    -11bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                1.03      1.19      1.33      0.90
 Hungary                  0.07      0.39      0.54      0.10
 Poland                   1.73      1.78      1.83      1.70
 Note: FRA  are for ask prices                              
 (Additional reporting by Luiza Ilie in Bucharest
Editing by Raissa Kasolowsky)
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