Draghi Guards Goldilocks Vibe in East Europe From U.S. Hawks

(Bloomberg) -- Don’t doubt Goldilocks. 

That’s the message from banks including Goldman Sachs Group Inc. to bond investors in eastern Europe who are questioning whether low inflation can continue to coexist with the fastest growth since 2011. ING Groep NV says a pickup in yields this year is “exaggerated.” Continued stimulus from the European Central Bank should keep borrowing costs under control, even amid hawkish rhetoric from the U.S. Federal Reserve, according to Citigroup Inc. and Erste Group Bank AG.

“While it’s tempting to play for central European reflation, we think the time is yet too soon,” Citi economists including Luis Costa wrote in an emailed note. “We continue to see resilience in booming economies with labor markets and economies closely intertwined with a surging core Europe.”

Federal Reserve Chairman Jerome Powell added to traders’ concerns last week when he hinted at the possibility of four rate hikes instead of three this year, a move that could suck cash from developing-nation bonds to Treasuries. At the same time, European Central Bank President Mario Draghi is expected on Thursday to push the need to keep the stimulus spigots open, offering eastern Europe some protection from U.S. rate increases and trade tariff concerns. The region conducts most of its trade with euro-area nations and its economies are embedded in European supply chains.

“The ECB will maintain its loose policy in the coming months,” Credit Agricole Bank Polska chief economist Jakub Borowski said. “This suggests the need for any tightening in the region is that much lower.”

Yields Rising

  • Hungary’s 10-year forint-bond yields are up more than 60 basis points since the end of December at 2.73 percent; they hit 2.74 percent on Feb. 5, the highest since October
  • The rate on similar maturity debt from the Czech Republic has risen by almost a quarter percentage point in the period
  • Polish yields are steady in the year to date at 3.27 percent, after recovering from a spike to 3.59 percent at the end of January
  • In Brazil and Russia, yields have dropped more than 70 basis points and almost a half percentage point, respectively

Last week, Goldman pushed back its forecast for central-bank rate increases in Hungary and Poland, in part because the ECB’s support will curb the need for their central banks to lift their own rates to retain investors. Polish central bank Governor Adam Glapinski on Wednesday extended his forecast for no changes to the country’s main interest rate until at least the second half of 2019 or 2020.

ING recommends investors in Hungary bet on lower one-year interest-rate swap rates in one year’s time to reap returns as traders realize their tightening expectations are overdone. The inflation rate fell below the central bank’s target band to 1.9 percent in February, official data showed Thursday.

Citi is short on the dollar against Poland’s zloty in its bond portfolio “as the best expression of central European growth,” analysts including David Lubin wrote in an emailed note.

More Resilient

For Citi, Hungary will probably only start nudging money-market rates higher at the end of next year. Even the continent’s most hawkish policy makers in the Czech Republic will only raise rates two more times this year amid “slightly disinflationary” risks, they predict.

“Unless there is a more marked move for much higher rates in the U.S., eastern European assets could remain more or less resilient,” said Zoltan Arokszallasi, an analyst at Erste Group Bank AG in Vienna. Domestic factors such as sturdy growth are more important and can help counterbalance the impact from potentially tighter U.S. policy, he said.

©2018 Bloomberg L.P.

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