BlackRock Warns It’s Too Early to Buy East EU Bonds, Currencies
(Bloomberg) -- BlackRock Inc. is warning investors against dipping back into east European bonds despite their increasingly fat premiums over German debt.
The sell-off in Czech, Hungarian and Polish government bonds will continue next year as central banks need to raise interest rates further before inflation peaks, according to Beata Harasim, a senior investment strategist at the world’s largest asset manager.
The region’s currencies -- typically aligned with the euro -- are also likely to weaken in 2022 as the Federal Reserve begins lifting rates, which should support the dollar, she told Bloomberg in an interview.
“It’s too early to say there’s value in local rates given the macroeconomic picture and what the central banks still need to do,” Harasim said from London. “Even though rates have moved a lot and the spreads versus German bunds are very wide, we’re not yet ready to take the other side of the trade.”
Inflation across the region was already quite high going into the pandemic with hefty fiscal support adding to price growth and tightening labor markets. A combination of commodity-price shocks and supply-chain disruptions only made it worse, she said.
Government bonds from the European Union’s three eastern members are on track for unprecedented negative returns this year in the wake of aggressive monetary tightening campaigns targeting a spike in consumer prices.
Hungary’s local-currency government bonds are heading for a 20% loss in dollar terms this year, followed by Poland with a 17% decline and the Czech Republic with a 13% drop, according to a Bloomberg debt index. A surge in yields pushed the premium investors get to hold the region’s bonds over German bunds to a 22-year high in the case of the Czech Republic.
Harasim sees the most value in Czech debt, but only once inflation peaks and the tightening cycles end. “The Czech central bank has been the most credible in the region, with a very clear guidance on where rates are going,” she said.
Here are her comments about Hungary and Poland, countries with less transparent monetary policies which are locked in a standoff with the EU over access to funds:
“In Hungary, central bank actions are really crucial. What they’ve done so far has prevented the currency from weakening further, but clearly the market needs more given the inflation picture. Also, we have elections next year and there’s still a lot of fiscal easing even with inflation so high and growth so strong. I understand why the market may be worried. Having a clear policy framework helps.”
“Polish inflation was already quite high before Covid, and the labor market was strong. There’s still a lot of inflationary pressures and the central bank waited quite late to start the hiking cycle. They’re aggressive now as they’re catching up. It’s really important they do continue rate hikes as inflation still hasn’t reached the peak. Clearly the risks are more to the upside for inflation in the short-term.”
“The rule-of-law issues with the EU are a big factor in Poland and Hungary. EU funds account for a large part of their GDP. The recovery fund is 8% of GDP for Poland and 5% for Hungary. And if cohesion funds were frozen, the impact on growth would be even more substantial. We’ll probably hear more on this in the spring. There’s a lot of political decisions that need to happen, we can only monitor that.”
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