Treasury Targets Hit But Short-Term Caution Warranted
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Our short-term bullish view on central European local debt (see CE Debt Looks Promising Over Short Term July 14 in our online service) has played out, with the Czech and Hungarian 5-year bonds hitting our downside targets at the end of July. While we expect the yields on both treasuries to trend further downward toward key resistance levels in the near term, we caution that further rapid yield compression beyond those points is not on the cards. We believe that the market has now largely priced in the diminishing likelihood of further rate hikes by the National Bank of Hungary (NBH) and Czech National Bank (CNB) in H208. At the same time, we maintain that the potential for rate cuts in either country is very limited, without which yields will find it difficult to make another swing downwards. Moreover, the economic slowdown in the eurozone is expected to be felt more prominently on both countries in the second half of the year, elevating fiscal risks throughout central Europe into 2009 and thereby adding pressures on local fixed income.