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Draghi Can't Stop Eastern Europe Bond Rally


 July 17th, 2017  |  09:29 AM  |   764 views



Local-currency bonds from Poland to Hungary have advanced this month in the face of growing concern the European Central Bank is on the cusp of reducing its unprecedented stimulus. The rally extends a 6.7 percent return for the region’s debt in the second quarter, the best in emerging markets.


Improving economic data and yields on average four times higher than those on offer in Germany are luring investment back to the region a year after some of the world’s biggest bond investors pared holdings to seek higher returns elsewhere. Investors at BlackRock Inc. and Allianz Global Investors GmBH said they see value in the bonds and analysts at Morgan Stanley and Credit Agricole SA last week named eastern European currencies among their top picks.


“Eastern Europe is a place that we like because the fundamentals are improving,” Sergio Trigo Paz, the head of emerging-market debt at BlackRock said on Bloomberg television this week. "At the same time, the rate story is still paying you some yield while Europe starts to normalize.”


Yields on German bonds have surged to an 18-month high of 0.6 percent since June 28 when Draghi said the reflation in the euro-area economy creates room to pull back the central bank’s 60-billion euro ($68.5 billion) monthly bond purchases. The rout reduced the spread between German and Hungarian 10-year notes to the narrowest in two years and trimmed the premium investors demand to hold Polish debt over bunds to an 11-month low.


Although emerging European economies are among the biggest beneficiaries of the stimulus, their falling debt levels and improved terms of trade will help mitigate any negative impact from tighter monetary conditions, according to Daniel Bebesy, a money manager who oversees $2 billion in assets at Budapest Alapkezelo.


Still, it’s too early to assess the impact of a decline in liquidity for the region, Bebesy said. More details on the ECB’s easing agenda are expected in August when Draghi attends the U.S. Federal Reserve symposium in Jackson Hole, less than two weeks before a meeting of the decision-making Governing Council in Frankfurt.


Eastern European economies grew 2.85 percent in the first quarter, the fastest pace in more than three years, while unemployment dropped last year to the lowest level since at least 1999, data compiled by Bloomberg show. Despite a surge in wages, inflation is set to stay below central bank targets, giving policy makers more time to keep rates at record lows.


The strengthening euro is also good news for currencies in the region, which will probably continue to strengthen versus the U.S. dollar, according to Naveen Kunam, a London-based senior portfolio manager at Allianz Global Investors. The Polish zloty, Czech koruna and Hungarian forint have surged more than 10 percent against the dollar this year, lagging only the Mexican peso in emerging markets.


“As developed market yields get repriced, central and eastern European debt will remain resilient due to strong macro factors,” Kunam said. “I expect to see the outperformance continue.”



courtesy of BLOOMBERG

by Marton Eder and Adrian Krajewski


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