June 12, 2018 / 9:41 AM / a year ago

CEE MARKETS-Hungarian bond yield rises as regional inflation picks up

    * Hungary's 10-year bond yield sets 13-month high
    * Romanian inflation surprises, rising to 5-year high
    * Fed and ECB meetings, if hawkish, could increase pressure

    By Sandor Peto and Luiza Ilie
    BUDAPEST/BUCHAREST, June 12 (Reuters) - Hungary's 10-year
government bond yield hit 13-month highs on Tuesday as a series
of higher-than-expected inflation data from Central Europe
caused worries over the country's ultra loose monetary policy.
    Possible hawkish comments from Federal Reserve and European
Central Bank (ECB) meetings later this week may put additional
pressure on the region's assets, traders said.
    The Hungarian central bank (NBH) is regarded as one of the
most dovish monetary authorities in the world. It has promised
to keep interest rates low for years.
    Its base rate, a short-term interest rate, is at a record
    Its pledge to fuel demand for long-term government papers
via its swap facilities helped the 10-year yield fall to levels
more than 100 basis points below its better-rated Polish peer by
early 2018.
    But the yield surged amid a rally of the dollar and U.S.
debt yields in May, rising more than 20 basis points in the past
three sessions to about 3.3 percent by Tuesday, trading 2-3
basis points above the Polish level.
    "The rise in inflation (across the region) raises questions,
and we see a repricing of various parts of the curve," one
Budapest-based trader said.
    "The central bank has been able to guide market expectations
well for years... Amid much more messy conditions, it is hard to
see into their thinking now," the trader added.
    Hungary's annual inflation was just above expectations in
May at 2.8 percent, still below the 3 percent target.
    But concerns are rising about how the NBH can resist the
tide if the Fed and the ECB rewind their earlier policy stimulus
faster than expected, and inflation rises more than forecast.
    Czech inflation in May also surprised to the upside on
Monday, rising above the Czech central bank's 2 percent target,
boosting the odds that it will increase its interest rates
further as early as August.
    The crown firmed somewhat to 25.635 versus the
euro on Tuesday, bucking a slight weakening of the region's main
currencies, but it is still less strong than the CNB had
    The leu also eased slightly even though Romania
reported a rise in its May annual inflation to a new 5-year high
of 5.4 percent on Tuesday, above expectations.
    The region's highest inflation is unlikely to force the
Romanian central bank (NBR) to rush into a rate hike at its next
meeting on July 4 as a high base is likely to push it lower
later this year.
    But coupled with slowing economic growth and a rise in the
trade deficit, high inflation is expected to lead to a rate hike
later this year.
    "We continue to see it (inflation) above the NBR's target in
December," Erste analyst Eugen Sinca said in a  note. 
            CEE       SNAPSHOT   AT                         
            MARKETS             1103 CET            
                      Latest    Previous  Daily     Change
                      bid       close     change    in 2018
 Czech      <EURCZK=   25.6350   25.6500    +0.06%    -0.36%
 crown      >                                       
 Hungary    <EURHUF=  321.7000  321.4000    -0.09%    -3.35%
 forint     >                                       
 Polish     <EURPLN=    4.2785    4.2680    -0.25%    -2.39%
 zloty      >                                       
 Romanian   <EURRON=    4.6600    4.6580    -0.04%    +0.42%
 leu        >                                       
 Croatian   <EURHRK=    7.3780    7.3793    +0.02%    +0.71%
 kuna       >                                       
 Serbian    <EURRSD=  118.0800  118.1000    +0.02%    +0.36%
 dinar      >                                       
 Note:      calculated from               1800 CET          
                      Latest    Previous  Daily     Change
                                close     change    in 2018
 Prague                1080.74  1077.280    +0.32%    +0.24%
 Budapest             36603.16  36606.38    -0.01%    -7.05%
 Warsaw                2243.38   2234.52    +0.40%    -8.85%
 Bucharest             8270.72   8257.51    +0.16%    +6.67%
 Ljubljana  <.SBITOP    890.99    897.59    -0.74%   +10.49%
 Zagreb                1831.48   1827.25    +0.23%    -0.62%
 Belgrade   <.BELEX1    729.81    732.51    -0.37%    -3.95%
 Sofia                  629.85    629.59    +0.04%    -7.03%
                      Yield     Yield     Spread    Daily
                      (bid)     change    vs Bund   change
 Czech                                              spread
   2-year   <CZ2YT=R    1.1040   -0.0030   +172bps     +0bps
   5-year   <CZ5YT=R    1.5720    0.0470   +170bps     +3bps
   10-year  <CZ10YT=    2.1390    0.0140   +163bps     +0bps
   2-year   <PL2YT=R    1.6030    0.0050   +222bps     +1bps
   5-year   <PL5YT=R    2.4700   -0.0130   +260bps     -3bps
   10-year  <PL10YT=    3.2720   -0.0140   +277bps     -3bps
            FORWARD   RATE      AGREEMEN                    
                      3x6       6x9       9x12      3M
 Czech Rep                1.19      1.35      1.47      0.92
 Hungary                  0.29      0.45      0.18      0.12
 Poland                   1.75      1.77      1.83      1.70
 Note: FRA  are for ask prices                              
 (Reporting by Sandor Peto, editing by Ed Osmond)
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