The European Central Bank’s liquidity injections have had a knock-on effect on emerging market fixed income products, including in central Europe, which have seen a strong increase in investor demand for government debt.

The revival in investor interest is also coupled with a return to bonds denominated in local currencies – attractive to investors as the zloty and forint recover from the risk flight that saw them fall steeply against the euro and the dollar in the second half of last year.

Arko Sen, director of EMEA strategy at Bank of America Merrill Lynch, said: “In the second half of last year you had significant currency weakness and US treasury yields were falling, so dollar-denominated emerging market bonds did better. This year the cycle has turned positive”.

Poland last week saw a more than double bid-to-cover ratio when it sold 4.08bn zlotys ($1.3bn) in 5-year local currency bonds at an interest rate of 4.837 per cent, the lowest yield in six years.

Warsaw is racing to take advantage of the turn in market sentiment. It has already placed 44 per cent of this year’s 176bn zlotys ($56.6bn) borrowing needs.

Nick Chamie, head of emerging markets research with RBC Dominion Securities, said: “As risk aversion has eased and risk premiums have declined, investors feel more confident in rebuilding their positions in emerging markets. As a result we’ve seen capital inflows into local fixed income markets”.

In late February, the Czech Republic successfully returned to the eurobond market after an 18-month absence, selling a 10-year €2bn at a coupon of 3.875 per cent after closing order books at €3bn. The spread was the lowest in the region, reflecting the country’s high credit profile, which also allowed Prague to be the first central European issuer to place 10-year bonds this year.

Also of note was Slovakia’s government bond auction – selling Kc12.5bn ($665m) in floating rate three-year bonds denominated in Czech currency. Slovakia has been a member of the euro since 2009, but Ivan Miklos, the outgoing finance minister, said that there had been significant investor demand in the Czech Republic for Slovak bonds.

Hungary is planning to issue about €9bn in international and domestic debt this year, about half of it in forints. But Hungary’s on-off talks with the IMF is one reason that has led all three ratings agencies to cut Hungary’s credit rating to non-investment grade.

The cost of that grimmer outlook can be seen in last week’s auction of Hungarian bonds that saw bid-to-cover ratios of more than 2, but with rates for three-year bonds averaging 8.32 per cent.

As the initial rush of ECB-provoked enthusiasm for riskier assets begins to fade, the countries of the CEE region will face greater investor discrimination.

Poland stands to do the best in the contest, thanks to its deeper and more liquid bond market, and to the country’s still solid growth prospects. The European Commission estimates GDP growth of 2.5 per cent this year, but government officials think it will be higher.

Related reading:
Slovakia: tapping the Czechs
, beyondbrics
Poland: end-of-year zloty shenanigans
, beyondbrics
E Europe exporters prove resilient
, FT

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