November 6, 2018 / 4:06 PM / in 9 months

CEE MARKETS-High bond yields drop, Romanian central bank sees CPI fall

    * Romanian central bank keeps rates on hold, sees CPI
    * Romanian, Hungarian bonds extend rally on liquid markets
    * Currencies ease slightly ahead of U.S. midterm election,
    * Hungarian bonds yields also drop, Polish bonds flat

 (Adds comments from Romanian central bank, analysts)
    By Sandor Peto and Luiza Ilie
    BUDAPEST/BUCHAREST, Nov 6 (Reuters) - Romanian and Hungarian
government bond yields fell on Tuesday, bucking a rise across
the European Union as the two country's central banks kept local
markets awash in money.
    The Romanian bank (NBR) kept its 2.5 percent benchmark
interest rates on hold as expected, and confirmed that it saw
inflation falling towards the top of its 1.5-3.5 percent target
range by the end of the year.
    The bank, like its Czech peer, has increased interest rates
to fight inflation which runs around 5 percent, and after its
last hike in May mostly kept liquidity in domestic markets
    But it injected over 16 billion lei into markets through an
auction last week, and a further 12 billion lei on Monday.
    That helped leu-denominated government bonds become an
attractive buy, after a surge in U.S. Treasury yields a month
ago also boosted yields in many emerging markets including
Romania and Hungary.
    Romanian bond yields set multi-week lows on Tuesday, and the
10-year yield traded near its lowest levels in six
months, around 4.7 percent.
    Inflation may decline slower than the NBR expects and the
bank could continue monetary tightening in 2019, Erste Group
analyst Eugen Sinca said in a note.
    "Once the ECB begins to contemplate rate hikes, the external
environment will begin to play a greater role in the decisions
taken by the NBR," he added. 
    Central European currencies, including the leu,
mostly eased slightly as investors held their breath ahead of
Tuesday's midterm elections in the United States and the Federal
Reserve's two-day meeting from Wednesday.
    Hungarian bond yields were fixed lower, with the
10-year yield dropping 9 basis points to 3.55 percent, after 
touching its lowest level in two months at 3.52 percent.
    Like Romanian peers, Hungarian yields have been falling 
since U.S. Treasury yields peaked last month.
    "The NBH (National Bank of Hungary) still maintains abundant
liquidity in markets with its swaps," one Budapest-based fixed
income trader said.
    "Yields here (and Romania) have been higher (than elsewhere
in Europe) and some foreign investors have fallen in love with
Hungarian bonds again," the trader added.
    Foreigners' forint-denominated government bond holding has
reached a 3-year high of almost 4 trillion forints
    Polish yields, which are usually more stable and more
willing to track German Bunds, were flat.
    The 10-year yield there, trading at 3.17 percent, has
declined by only 15 basis points from its October peak, compared
with almost 40 basis points shed by its Hungarian and Romanian
    The Polish central bank is also expected to keep its
interest rates on hold on Wednesday.
    "But if the (Monetary) Council will say that they are
planning a rate hike in 2019, that would surprise the markets,"
said Mateusz Milewski, a dealer at mBank.
            CEE       SNAPSHOT   AT                         
            MARKETS             1617 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.8500   25.8120    -0.15%    -1.19%
 crown      >                                       
 Hungary    <EURHUF=  322.0500  322.0100    -0.01%    -3.46%
 forint     >                                       
 Polish     <EURPLN=    4.3085    4.3084    -0.00%    -3.07%
 zloty      >                                       
 Romanian   <EURRON=    4.6630    4.6610    -0.04%    +0.36%
 leu        >                                       
 Croatian   <EURHRK=    7.4375    7.4395    +0.03%    -0.10%
 kuna       >                                       
 Serbian    <EURRSD=  118.3900  118.3800    -0.01%    +0.09%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1073.36  1072.440    +0.09%    -0.45%
 Budapest             37680.11  37794.87    -0.30%    -4.31%
 Warsaw                2227.93   2233.74    -0.26%    -9.48%
 Bucharest             8607.89   8573.48    +0.40%   +11.02%
 Ljubljana  <.SBITOP    797.99    799.74    -0.22%    -1.04%
 Zagreb                1776.39   1771.45    +0.28%    -3.61%
 Belgrade   <.BELEX1    741.91    740.93    +0.13%    -2.35%
 Sofia                  594.29    596.67    -0.40%   -12.28%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.6660    0.1210   +231bps    +12bps
   5-year   <CZ5YT=R    1.8550    0.0050   +203bps     +0bps
   10-year  <CZ10YT=    2.1400    0.0090   +171bps     +0bps
   2-year   <PL2YT=R    1.5410   -0.0100   +218bps     -1bps
   5-year   <PL5YT=R    2.4410    0.0120   +261bps     +1bps
   10-year  <PL10YT=    3.1910    0.0050   +276bps     +0bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                2.05      2.20      2.35      1.97
 Hungary                  0.33      0.59      0.94      0.16
 Poland                   1.77      1.80      1.87      1.72
 Note: FRA  are for ask prices                              

 (Additional reporting by Alicja Ptak in Warsaw,
Editing by Matthew Mpoke Bigg and Ed Osmond)
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