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Home/News/Emerging Europe’s Bond Standout Gets Another Rate Surprise

Emerging Europe’s Bond Standout Gets Another Rate Surprise

One of eastern Europe’s last dovish central banks is giving the region’s best-performing bonds another boost.

The National Bank of Serbia surprised with its third unexpected interest-rate cut in seven months on Wednesday, a further reason for investor optimism over local-currency bonds that have outperformed all of their regional peers this year.

Perched on Europe’s periphery, Serbia is going against the tide of a gradual shift toward policy tightening across most of the continent. The Balkan country has little need for rate hikes any time soon, with inflation slowing to the bottom of the central bank’s target range in February and continued appreciation in the dinar.

“Sentiment is positive toward the bonds: they are increasing supply, and that automatically boosts demand for the dinar,” said Stephan Imre, a strategist at Raiffeisen Bank International AG in Vienna who recommends buying the notes. “This is a very good departure point for further easing.”

Serbia’s dinar bonds have returned 5 percent this year in dollar terms, beating the 3.2 percent average of 32 nations in the Bloomberg Local-Currency Sovereign Index. Last month, the dinar touched the strongest level against the euro in more than three years. It’s the second-best performing currency in the world over the last 12 months.

Inflation slowed dramatically to 1.5 percent last month, half the rate seen in December and a 15-month low. Weak price pressures will persist for months to come, and inflation will only gradually approach the 3 percent target in the middle of next year, policy makers said in a statement after Wednesday’s meeting.

Bond gains have also benefited from government efforts to include the debt in emerging-market gauges used by passive investors, a move that would increase foreign holdings and further lower yields. To help hit this goal, the debt agency in Belgrade started offering new five- and 10-year bonds this year, extending the length of available maturities.

“The low inflation environment should be good for bonds and lead to an increase in portfolio flows,” said Javier Sanchez, a strategist at UniCredit SpA in London who recommends buying the nation’s 10-year securities. “Investors will be attracted by the high real rates in dinar and the medium-term prospect of the bonds being included in indexes.”

Serbia’s 10-year notes still offer a yield of 5.88 percent, more than double the rate on Hungarian and Czech securities. The former Yugoslav republic is one of few nations in eastern Europe that still offers a positive real yield on short-term investments.

Raiffeisen’s Imre and UniCredit’s Sanchez see policy makers cutting the key rate one more time this year to 3 percent.

“Yields have come down in Serbian dinars but still offer value in the region,” said Emilia Matei, a research analyst at Standard Life Aberdeen, which manages about $14 billion in emerging-market debt.

Source; Bloomberg