Liquidity in CEE fixed income markets has slowed to a trickle as a direct consequence of the insecurity stemming from the political watershed in the Eurozone and we are observing some unusual patterns of behavior as a result. Yesterday, as one would have expected, yields on POLGBs backed up between 7 & 12 bps across the curve as the PLN weakened and CDS spreads widened. At the same time, yields on Polish Eurobonds dropped by up to 9 bps at the long end of the curve. All eyes will be on the MPC rate decision today. Odds are still on that the MPC will hike by 25 bps but the probability of that occurrence has fallen. If rates are kept on hold, we would expect POLGBs to play catch up with Eurobonds. Overall though,
CEE bond markets seem largely unmoved by the volatility on major equity markets. Yields in Croatia have fallen following another round of successful TBill auctions and Romanian bonds got a boost from remarks from NBR Governor, Mugur Isarescu, that reserve requirements would be cut from 15%, freeing up around RON 6 bn of liquidity. This may seem innocuous but given the reasoning behind the announcement (a large bank has tapped the Lombard facility as it faces difficulties accessing funding) it should be a little disturbing and lead to a rise in credit premiums. Indeed, CDS rose 7 bps on the day.

Source: bne