Vigilant bonds invade European economies where inflation is hot
Bond markets are notorious for pushing their agenda forward, and in Eastern Europe right now they’re pushing for rate hikes, not to mention what central banks have to say about it.
Bond yields from Hungary and Poland are rising faster than anywhere else in Europe. Hungary jumped 32 basis points last week, signaling traders are poised for a rate take-off as inflation comes to life ahead of widespread economic reopenings this summer.
Like their peers in Frankfurt, central bankers in Hungary and Poland have indicated that they are in no rush to curb inflation which may turn out to be temporary, preferring to wait and foster a still fragile economic recovery afterwards. the pandemic.
The traders are less patient. In Hungary, implicit market pricing shows expectations of 130 basis points of rate hikes in two years, according to Bloomberg data.
“The central bank is walking a tightrope here,” said ING economist Peter Virovacz. “If he can credibly communicate that he thinks the CPI would return to its 2% to 4% tolerance band next year, he can wait until the peak is over and avoid a hawkish cycle.”
The situation reminds me of political adviser James Carville’s joke that when he died he wanted to come back as a bond market because “you can intimidate anybody.”
Carville was talking about traders who drove up yields to protest a soaring budget deficit in the mid-1990s, but there are parallels to the Hungarian and Polish bond selloff over fears an economic boom could spiral. inflation.
These last-day vigilantes could gain the upper hand, with strategists at JPMorgan Chase & Co. reiterating their advice to remain underweight bonds in Central and Eastern Europe.
A premature end to buying programs is a big risk for Poland, where the central bank bought the equivalent of 48% of issues and Hungary where it accounts for nearly a third of purchases, according to JPMorgan.
If Polish policymakers advance their rate hike schedule, the central bank would also have to end its quantitative easing program, potentially removing the current safety net from the market.
Polish policymaker Eugeniusz Gatnar recently called for a rate hike in June. However, his voice remains in the minority on the panel of 10 people. Polish central bank governor Adam Glapinski said rates would remain at their lowest level until the end of the current policy makers’ term, which ends in early 2022.
However, the threat of inflation may be real: in Hungary, the annual pace of consumer prices has recently accelerated to 5.1%. In Poland, it is 4.3%. Both are above the upper end of central banks’ tolerance range, and stack up against a 4.2% inflation reading in the United States that sent markets plummeting last week.
“With surprising inflation on the rise and growth on the mend, we believe market discourse will increasingly focus on the sustainability of QE in Central and Eastern Europe,” according to emerging market strategists at JPMorgan, including Saad Siddiqui.