Negative Yields Creep Into Emerging Europe

(Bloomberg) -- The rally in eastern Europe’s sovereign bonds has left yield-hungry investors with little to grasp at, pushing many toward higher-risk alternatives.

All of the Czech Republic’s outstanding euro bonds are trading at negative yields, while the rate on Poland’s 2029 note is 16 basis points away from dropping below zero. Junk-rated Serbia’s 10-year bonds offer less than 1.5% and the spread on euro-area hopeful Croatia’s 2028 notes has almost halved this year.

“Central and eastern Europe can’t win much” in terms of further tightening of spreads, said Lutz Roehmeyer, who helps manage 700 million euros ($786 million) at Capitulum Asset Management in Berlin. “The region is coupled with the euro area developments, its yields are already low and cannot go much lower.”

The changing sentiment is a ripple from investors preparing for a weaker growth outlook. Even after a stronger-than-anticipated U.S. jobs report on Friday, futures contracts are still pricing in a quarter-point easing or more from the Federal Reserve. Markets are also betting that Christine Lagarde will extend ultra-loose monetary policies at the European Central Bank.

Those shifts have helped push already-depressed bond yields across the continent to record lows.

“Clients who were used to much higher yields have a hard time looking at Croatia or Serbia at these levels,” said Lovro Kuspilic, a fixed-income trader at Amsterdam-based broker AFS Interest.

Issuance Bonanza

That isn’t deterring countries from filling budget coffers in the low-rate environment. Romania is offering to sell 12-year euro-denominated bonds on Tuesday at around 210 basis points above midswaps, and tapping its notes due 2049 at a yield roughly 90 basis points lower than when they were first sold in March.

The Black Sea country is entering the market for the second time this year, a day after Slovenia had a sale of its own. Last month, Croatia, Serbia and Ukraine all issued euro debt.

But with credit spreads tightening further and about a quarter of global debt carrying a negative yield, bond investors are being pushed toward even more exotic or volatile credits. Turkey’s euro bonds due 2026 trade at a yield of 5.04%, while Ukraine’s new seven-year notes still offer 6.02%, despite dropping almost 100 basis points since their pricing on June 14.

“We have ridiculously cheap valuations imposed by political risk in Turkey, and in Ukraine our bets on a new stable government after elections is not yet in the price,” said Gintaras Shlizhyus, a Vienna-based credit analyst at Raiffeisen, cautioning that the change at the helm of Turkey’s central bank over the weekend “wasn’t anything good.” He also has a buy recommendation for Serbia, Kazakhstan and North Macedonia.

--With assistance from Lyubov Pronina.

To contact the reporters on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net;Maciej Onoszko in Warsaw at monoszko@bloomberg.net

To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, ;Vivianne Rodrigues at vrodrigues3@bloomberg.net, Marton Eder, Andras Gergely

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