CEE currencies mixed

Forint-denominated Hungarian government bonds retreated on Friday as investors continued to shift into foreign currency debt following a decline in domestic yields. Investors globally are seeking higher yields offered by emerging market assets relative to developed markets. In Romania, domestic debt as well as foreign currency debt is in demand, due to still high yields, and demand for Romanian paper on Friday lifted the leu.
Central European policymakers have been cutting interest rates to help their economies fight recession or economic slowdown, but yields are still mostly attractive. Hungary's central bank has cut its base rate nine times, each by a quarter percentage point, since August to 4.75 percent. Markets have priced in further cuts to 3.50 percent, pushing yields on forint-denominated bonds to record lows in the past few weeks and below yields on euro- and dollar-denominated bonds. Foreign currency bond yields would normally be lower as forint bonds usually include a yield premium to cover foreign investors' exchange rate risk.
"Many local funds have now switched to foreign currency bonds (in the past few days), and in linked derivatives deals investors can get an additional yield premium," a Budapest-based fixed income trader said. "The yields on 10-year dollar bonds have come down (in recent days) to near 5 percent from 5.5, while the 10-year forint bond yield rose to 5.45 percent from 5.3 percent," the trader said.
In the Czech Republic, where the central bank has already cut rates to near zero, the yield on 10-year eurobonds fell to record lows below 2 percent. Currencies in the region were mixed, with the Czech crown firming 0.2 percent and the Romanian leu gaining 0.1 percent against the euro by 1444 GMT. The forint eased 0.4 percent and the Polish zloty shed 0.2 percent. Weak data from the region and from main trading partner Germany, along with cuts in interest rates, have weighed on the regions' currencies in the past few months.
Romania, though, has resisted cutting rates to boost its slumping economy because of nagging concerns over inflation, and strong demand for the country's bonds after they were included in regional indices has underpinned its currency. "It seems like another day of gains for the leu, and central bank agents don't seem to be on the bid side noticeably," said a dealer in Bucharest. Yields on Romanian 10-year bonds fell 58 basis points at an auction on Thursday, boosting the leu.