CEE economies likely to receive support from ECB in local currency bond markets

The economies of the Central and Eastern European region are expected to receive support from the European Central Bank (ECB) in local currency bond markets. Looking forward, the ECB-driven environment will definitely provide additional support for CEE bond yields through the overall sentiment.

Croatia was one of the best performers in the CEE region thus far. However, recent yield developments indicate that local factors played an important role, with the better-than -expected macro and fiscal   performance and formation of the new government driving yields downwards.

In general, yields on Czech bonds remain very low or negative, due to low inflation, high demand among non-residents and the low price of liquidity. The possible extension of the QE program poses a risk of postponing the exit from the CNB FX commitment. In that case, demand among non-residents should slightly decrease, implying lower pressure on Czech yields. However, yields on shorter maturity bonds will remain negative, ERSTE Group Research reported.

Further, Romanian bond yields are at lower levels than those suggested by fiscal and inflationary risks, supported by the ample liquidity supply by the ECB. The country’s 10Y yields are expected to close to current levels in the next 3-4 quarters and then on an upward trend, the report added.

"A very important factor for CEE yields is the outlook for the ECB policy. Draghi’s own words suggest an abrupt end to QE is ‘unlikely’. Should yields on major European bond markets decline further, due to a longer-lasting dovish policy of the ECB, this could provide room for yield drops," the group research commented in its latest note.