CEE Bond Technicals: Foreign Bondholders and Sovereign Ratings

Bond

Summary:

Foreign investors are exiting CEE4 markets and we see unfavourable conditions for this year. Governments have to rely more and more on domestic demand. Turkey should see a continued return of foreign investors to the local market. In terms of sovereign ratings, we are positive on Turkey but negative on Hungary and Romania.

Foreign bondholders: Gradual outflow of foreigners and more reliance on domestic demand

If 2023 was a good year for foreign inflows into local currency bond markets in the CEE region, 2024 and especially the second half saw a turn with outflows across the region. No doubt local fiscal issues and a negative global environment are not supportive for the region and we are unlikely to see a different picture this year. Within CEE4, only in the case of Czech government bonds (CZGBs) do we see that foreign inflows can keep pace with domestic demand and if we ignore the methodological one-off in the Czech data, CZGBs is the only market that shows a relative increase in foreign bondholders year-on-year.

On the other hand, Romania and Poland saw stable foreign holdings leading to a deterioration in relative terms late last year. Hungary has seen foreign outflows since the middle of last year and has lost the most among CEE peers. We believe that with still-high borrowing needs, heavy issuance and limited room for rate cuts, it will become more and more difficult to attract foreign demand. Governments will have to rely on local demand, which in some cases seems already saturated after last year.

In Turkey, foreign bondholders reached 10% in November and December versus 2% in January 2024. We expect inflows to continue due to the yield level and rate cuts story along with favourable technicals. The weighting of Turkish government bonds (TURKGBs) in the GBI-EM index is gradually increasing from a 0.75% bottom to the current 1.50%. We believe the weighting will continue to increase which should support further inflows into the TURKGBs market.

Foreign bondholders (%)

Sovereign ratings: Positive on Turkey, negative on Hungary and Romania

In the past year we have seen several rating changes in both directions across the region. For this year, we are particularly positive on Turkey, where further normalisation of the policy and economic environment could bring another rating upgrade in the second half of 2025. We are neutral on Poland and the Czech Republic, where we expect relative metrics to stabilise versus peers. We are negative on Hungary and Romania given rating agencies' sensitivity to political uncertainty and deterioration in fiscal metrics.

In Poland (A2/A-/A-), the sovereign rating and outlook seems the most stable in the CEE region and so far there are no indications of any changes. Agencies typically cite the lack of efforts to consolidate public finances as the main risk to the rating. On the other hand, Poland unlocked EU money last year and outperforms peers in GDP growth-stabilising relative metrics. Overall, we thus see the risk of some change in either direction as low for this year.

In the Czech Republic (Aa3/AA-/AA-), Fitch upgraded the outlook from negative to stable in the past year, as have the other agencies, which likely exhausts the scope for any changes. We do not see any changes in the top-rated country in the CEE region this year.

CEE Bond Technicals: Foreign Bondholders and Sovereign Ratings_2

In Hungary (Baa2/BBB-/BBB), Moody’s downgraded the outlook from stable to negative last November, mainly due to the loss of some EU money, weaker-than-expected growth and limited impact of FDI inflows on the economy. In contrast, Fitch upgraded the outlook to stable from negative in December due to the bullish outlook on the economy in the coming years. For now, we do not see further changes in the near term but risks point to the downside. Another weaker year for the economy along with the political cycle and EU money discussions may lead to further negative moves from the rating agencies in our view.

In Romania (Baa3/BBB-/BBB-), Fitch revised the country's outlook to negative from stable in December last year following a failed fiscal consolidation and political uncertainty resulting from the general and presidential elections. Fitch reaffirmed Romania's abilities to react the quickest to adverse developments in the CEE region. We thus see further ratings reviews by other agencies this year resulting in potential negative outlooks. Romania will have to meet the European Commission consolidation criteria this year to avoid further negative actions by the rating agencies.

In Turkey (B1/BB-/BB-), in the past year we have seen rating improvements from all three major agencies. Moody’s upgraded by two notches with a positive outlook in July. S&P upgraded the rating by one notch each time in May and November. Fitch upgraded the rating in two steps in April and September. The agencies' reports mention falling inflation, strengthening lira credibility and reduced FX exposure. We expect the rating upgrades may continue in the second half of this year, in particular with regards to Moody's catching up with S&P and Fitch.

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

ING

Commodity

Energy

Oil prices came under pressure yesterday after President Trump's virtual address at the World Economic Forum at Davos, where he called for lower oil prices. The president said he would ask Saudi Arabia and OPEC members to bring prices down by increasing output. Trump said that lower oil prices could be used as a way to pressure Russia and help bring an end to the war in Ukraine. In his previous term, President Trump was very vocal about OPEC needing to pump more oil. However, with Russia becoming increasingly more aligned with OPEC members through the OPEC+ alliance, as well as higher fiscal breakeven oil prices for key members, it will be no easy task to convince OPEC to increase output. According to the IMF, Saudi Arabia is estimated to have a fiscal breakeven oil price just shy of US$91/bbl. Furthermore, lower oil prices would also be an obstacle to significantly increasing US oil production.

The EIA’s weekly oil report showed that US commercial crude oil inventories fell by 1.02m barrels over the last week. This is the ninth consecutive week of declines in crude inventories, which leaves stocks at their lowest level since March 2022. This decline came despite refiners slashing run rates, which was driven by maintenance largely in the US Gulf Coast. Refiners cut utilisation rates by 5.8pp week-on-week, which saw crude oil inputs decline by 1.13m b/d. On the trade side, crude imports increased 621k b/d WoW, while exports also increased by 437k b/d. The increase in imports was largely driven by stronger flows from Canada. As for refined products, gasoline stocks increased by 2.33m barrels, despite the big fall in refinery activity. However, gasoline stocks on the East Coast fell following the temporary outage along the Colonial pipeline. Meanwhile, distillate stocks fell by 3.07m barrels WoW.

The EIA also released its weekly natural gas storage report in which US working storage was reported to have fallen by 223Bcf, less than the 248Bcf draw the market was expecting. The smaller-than-expected draw and forecasts for some warmer weather saw Henry Hub tick lower yesterday.

European gas prices remain relatively well supported, with TTF trading just shy of EUR50/MWh. Concerns over EU gas storage remain with inventories now below 58% full, down from 74% at the same stage last year and below the five-year average of 66%. The market and member countries are becoming increasingly concerned about the task of refilling storage through the injection season and the fact that the forward curve provides no incentive to store gas for next winter. The forward curve is in backwardation between summer 2025 and winter 2025/26. Talk of subsiding the refill of storage is growing.

Risk Warnings and Disclaimers

Add to Favorites

ING

Bond

Economic

The central bank kept its rates unchanged in December

As expected, the National Bank of Hungary kept its key interest rate unchanged at 6.50% in December. The interest rate corridor also remained unchanged, with a range of +/- 100 bp around the key rate. In line with its stability-orientated approach, this decision was again influenced by geopolitical tensions, risks to the inflation outlook and, most importantly, volatile financial market developments, i.e. the significant weakening of the Hungarian forint. Although the macroeconomic background would have supported some change, the decision was not unexpected by the market given the instability. We expect something similar in January.

The main interest rates (%)

Some early red flags on the macro horizon

Headline inflation accelerated in December, rising to 4.6% year-on-year (YoY). The acceleration was mainly driven by further increases in food, fuel, household energy prices and durable goods, due to the further significant depreciation of the forint.

Although underlying inflation is also on the rise (core inflation rose to 4.7% YoY in December), this is not overly worrying data. Especially as the annualised three-month-on-three-month core inflation fell. The bigger problem is that the items whose prices rose the most are also the items that have the biggest impact on perceived inflation, and these also have a negative impact on household confidence.

In terms of risk perception from a monetary policy perspective, the December budget deficit was low compared to recent years, and thus the annual budget remained below the modified cash flow deficit target.

However, the accrual-based deficit was higher than targeted, making it even more difficult to meet the 2025 fiscal plan. As for the external balances, we have not seen an alarming deterioration, but the strengthening import activity is clearly reducing the surpluses. In short, we are not talking about earth-shattering changes, but these factors call for caution.

Headline and underlying inflation measures (% YoY)

Financial market instability remains the real deal

The early red flags mentioned above alone should not scream out for a fully defensive stance. However, the ongoing instability and high volatility in the financial markets have once again closed any kind of debate before it had even started.The EUR/HUF exchange rate remains the central bank's focus when it comes to financial stability. Since the December meeting, the exchange rate has been in the 410-415 range.

Although there has been a downward trend since the peak in early January (416), the forint is still significantly weaker than its 100- and 200-day moving averages. Moreover, the past few weeks (the run-up to President Trump's inauguration and the first few days) have seen significant intraday volatility. In this environment, it is better to be safe than sorry if you need to manage a high-beta currency.

But this time it is more than just FX. Core rates have moved significantly higher over the past month, although this has mainly affected the long end of the US yield curve, which rose by around 20bp by 22 January. The short and long ends of the Bund yield curve have also moved up by around 20-30bp, with a steepening bias. As a result, the yield on 10-year Hungarian government bonds jumped by 45bp.

The risk premium also increased, as the spread between 10-year HUF and PLN government bond yields widened by 40bp compared to the December meeting.In such an environment, it is hardly surprising that the central bank's communication continued to focus on a cautious, patient and stability-orientated approach. Moreover, this has been complemented by a similar tone from the future central bank governor Mihaly Varga. The market's expectation is therefore crystal clear: no room for a rate cut at the start of the new year.

Performance of CEE FX versus EUR (end-2023 = 100%)

Our call

All things considered, we see no room for the central bank to ease monetary policy in the short term. In our view, the National Bank of Hungary will leave the interest rate complex unchanged at its next rate-setting meeting on 28 January. This will leave the key rate at 6.50%, which is a high conviction call. We also expect the Monetary Council to leave both ends of the interest rate corridor unchanged.It is important to note that this is the penultimate meeting of the current Monetary Council. Governor Gyorgy Matolcsy's term ends in March, as does that of Council member Gyula Pleschinger. Vice-President Mihaly Patai's term also ends in April.

Despite the expected personnel changes, we do not expect any rate cuts in the first quarter. However, the March meeting will be very interesting.In the second quarter, the new Monetary Council could take action if the situation warrants it, but this is far from a high conviction call. Nevertheless, based on our forecasts for the European Central Bank's and the regional central banks' rate paths, we believe that a total of 75bp of rate cuts could be implemented this year in Hungary, starting in June at the earliest, which would be in line with the average size of easing cycles in the region.

Our market views

EUR/HUF remains in the market spotlight and seems to be the main driver of monetary policy and HUF assets. Realised FX volatility has declined significantly since December but still remains well above CEE peers. In particular, positioning rebalancing in global markets after President Trump's inauguration has brought visible relief for the forint, allowing a return to 410 EUR/HUF in recent days, which we believe is consistent with the levels indicated by the rate differential in our models (410-412).

A pause in global pressure in the EM space and a cautious tone from the NBH should provide some reassurance in EUR/HUF. However, medium term we expect EUR/USD to move lower again and the market's dovish bias in HUF rates will combine to push EUR/HUF higher again. Thus, we maintain our end-1Q forecast at 420. The wild card on the positive side here may be some progress in the Ukraine-Russia conflict and any peace deal discussions should support CEE FX, which could benefit the HUF significantly through the channel of lower commodity prices and the general openness of the Hungarian economy.

Hungarian yield curve

With the lower EUR/HUF, risk-on sentiment towards fixed-income assets has returned to the market. The rates market is currently pricing in roughly two 25bp NBH rate cuts within a year and pricing is quickly returning to rate hikes in the longer-term horizon. Looking further out the curve remains very flat. While we cannot expect any dovish surprises from the NBH in the near term given FX volatility and higher inflation in December, we still believe the IRS curve offers good value within CEE peers. Moreover, the calmer FX market in recent days will, in our view, attract receivers back into the belly curve in particular, with the 5y IRS around 6.50%, matching the policy rate.

HGBs, which have seen significant foreign outflows in recent months, seem equally attractive. In January in particular, we saw a significant widening of spreads vs most CEE peers, resulting in more attractive valuations. This year we should see a noticeable increase in HGB issuance given the debt agency's greater focus on local funding, but against that, we should see demand coming from high redemptions of HGBs, T-bills and the retail bond market which should cover most needs.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

ING

Economic

Bond

Declining external demand and an unfavourable global environment are forcing governments to shift to local sources of funding, increasing gross local currency issuance in most countries.

Eurobond issuance for the CEE region should remain elevated compared to pre-Covid years, while Hungary stands out as an outlier in continuing to reduce supply and successfully front-loading its needs.

The CEE region failed to deliver on the promised consolidation of public finances last year and the rising debt burden is weighing on fiscal policy this year as well.

Most countries ended up with higher gross borrowing needs last year than initially indicated, a bias that we take into this year. In addition, the political cycle plays against already heavy borrowing needs with presidential elections in May in Poland and Romania, a general election in September in the Czech Republic, and an election campaign starting in Hungary ahead of a general election in April 2026.

So this year we see higher borrowing needs in all the countries we cover despite the plan to reduce the government deficit across the board. The exception is Romania, which on paper expects to consolidate public finances after a record deficit last year, but as we discuss in the country page, the planned consolidation is built on shaky foundations.

Local currency issuance: Reorientating back to local funding

With rising borrowing needs and falling demand, governments need to diversify funding sources more, which we see as a trend over the past two years in the region. Indeed, especially in the second half of 2024, we saw the start of outflows of foreign bondholders in most countries, and this year's conditions do not suggest an early turnaround.

On the local side, fiscal policy, the election cycle and the late stage of central bank rate cuts are weighing on demand, while on the global side elevated core rates and the global aversion to unsustainable fiscal policy are more likely to support risk aversion to debt in the CEEMEA space.

However, in some cases the local markets have saturated their demand in the past year and therefore we are seeing more and more T-bills issued to bridge higher bond yields, and to lure over-liquidated local banking markets.

At the same time, retail bond issuance is increasing in an attempt to diversify bondholders and reach households' high savings built up post-Covid and the high inflation period. However, maintaining demand in these segments is now a prerequisite for keeping local bond issuance in check, and so increasingly we need to keep an eye on the overall funding picture in case one source of funding falls out and is replaced by another, usually local bonds.

In the baseline scenario, we expect an increase in local-currency bond issuance in all countries in the CEE region except Poland, where we have seen an all-time record supply in the past year.

While supply should be only marginally higher in the Czech Republic due to higher redemptions, the increase is more pronounced in the rest of the region as governments reorientate themselves towards local funding resources.

At the same time, it is important to take into account that next year promises high issuance in most countries as well, given the absence of a significant public finance consolidation plan and an uncomfortable redemption schedule. Therefore, we are likely to see efforts to prefinance next year as well, if market demand permits, further increasing overall bond supply.

Frantisek Taborsky, EMEA FX & FI Strategist

FX issuance: Another busy year ahead

After a record year for Eurobond issuance in 2024, CEE sovereigns are set to be very active again this year in the primary market, given the lack of significant fiscal tightening. In this context, Hungary is a clear outlier, making steps to reduce gross Eurobond issuance, and successfully front-loading its plans with a EUR2.5bn issuance in the first week of the year. Romania and Poland have been slightly slower out of the gate relative to 2024, with Romania so far holding off until finalising the 2025 budget and hoping for some of the political volatility to recede.

While on paper Romania is also budgeting for lower Eurobond issuance across the year, there is plenty of uncertainty and risks remain for higher-than-planned issuance, with experience from last year likely to keep investors cautious. In Turkey, gross issuance is set to remain high, but this is largely an exercise in refinancing, with net supply modestly negative.

CEE-3: EUR & USD international sovereign bond issuance (USD equivalent)

Some trends from 2024 are likely to continue, with the focus for most on a wide range of funding sources (EU money, green bonds, alternative currencies, along with sukuk issuance for Turkey), although EUR paper should be dominant for Poland, Romania and Hungary. The question of tenor is less certain, with evidence from early in the year suggesting that most issuers are likely to avoid longer maturity, 30-year deals, given the move higher in long-end rates we have seen – this trend should continue if our expectation for structurally higher rates in the US plays out over the year.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Economic

Diversification was the primary supply chain strategy for global executives in 2022 and 2023, according to Economist Impact’s Trade in Transition surveys. Many operations in the Asia Pacific are adopting a ‘China+1’ strategy, where companies expand their operations and invest beyond just China. While this approach is not solely in response to the trade conflict, it remains central, with ongoing tensions as the most significant future trade concern.

But diversifying supply chains is not a seamless process. Rule of law, political stability and dispute resolution are key factors that influence business relocation decisions.

Such shifts are slow to materialise. Nearly half of German executives still rely on China for key intermediate goods, highlighting how sourcing dependencies — particularly for critical minerals — complicate decoupling. For Newell Brands, a US consumer goods company, reshoring from China poses capacity challenges as North America lacks China’s production scale. Chinese imports continue to influence US manufacturing output, despite reduced direct sourcing since 2017 following changing trade dynamics.

As diversification plays out gradually amid a tense geopolitical environment, companies are turning to friendshoring to manage risks. Businesses are consolidating suppliers among their trusted networks by reducing supply chain tiers, a strategy that saw a 16 percentage point increase in respondents to 26 per cent between 2022–23.

Regional trading blocs like ASEAN have registered strong GDP growth (1.5 percentage points higher than the global average of 3.2 per cent in 2024) as they feel the ripple effects of these shifts. Treaties like the Regional Comprehensive Economic Partnership are tapping into integrated supply chains and could accelerate reshoring to Southeast Asia, as tariffs and non-tariff barriers are set to decrease leading up to 2045. Powered especially by investments in the electric vehicles and electronics manufacturing industries, regional economies like Vietnam could win big.

In 2023, Vietnam’s relationship with the United States was elevated to a comprehensive strategic partnership. As a growing ally, Vietnam is benefitting from increased US foreign investment in fields such as AI, semiconductors and clean energy. Vietnamese exports to the United States are increasing year-on-year as factory relocation from China to Vietnam rises. Yet, the United States’ decision to continue to classify Vietnam as a non-market economy is likely to hinder further upgrades in bilateral relations.

Mexico has also benefited from this supply chain strategy through its friendly trade relations with China and the United States. Businesses in China are engaged in a strategic offshoring manoeuvre to establish a presence in Mexico, where they are able to bypass trade barriers and benefit from access to the US market through the US–Mexico–Canada Agreement. This swelled Chinese direct investments into Mexico by 300 per cent between 2018–19 and 2022–23.

While some markets will benefit from friendly supplier networks, they are likely to strain geopolitical relations. A more regionalised global trading order will intensify geopolitical tensions, as evident from rising trade interventions justified on grounds of national security.

The US-led Minerals Security Partnership Finance Network, established with allies including India and Japan, is one such example. It aims to reduce reliance on nations like China for critical resources — particularly rare earth minerals essential for the clean energy transition — while excluding China from strategic supply chains.

The weaponisation of supply chains is also evident in the technology industry. There is a lack of substitutes for Taiwanese semiconductor chips in Asia due to limited production scales, more nascent technology and significant gaps in capital investments. Amid Taiwan Strait tensions, this allows major export countries to weaponise their advantage by imposing export bans on countries critical of their roles.

US President Donald Trump’s plans to impose unwarranted substantial tariffs on imports from China, Canada and Mexico signal a renewed weaponisation of trade. These measures risk sparking trade wars, raising consumer prices and destabilising the global economy. With globalisation politics already unfriendly, these actions pave the way for more protectionist policies in the near future.

Close to four billion people went to the polls last year, with serious implications for business environments, policy and trade strategies. While the United Kingdom’s new Labour government may be keen to improve UK–EU trade relations, the imposition of countervailing duties on Chinese battery electric vehicle imports indicates growing protectionism in the region.

In India, Prime Minister Narendra Modi’s new coalition government is likely to continue protectionist policies which will limit the global supply chain integration of some sectors. Meanwhile, new import duties on certain Chinese goods in Indonesia suggest a potential shift in President Prabowo Subianto’s aim to attract Chinese investment.

Pivotal changes by these new governments — alongside the return of the Trump administration — could markedly determine the future course of the global supply chain drift.

Source：Eastasiaforum

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Political

Some 15 months after Hamas triggered the devastation of the Gaza Strip by attacking Israel, the future of the Palestinian population there and in the occupied West Bank may hinge on US President Donald Trump’s determination to oversee the normalisation of relations between the Jewish-majority state and the Arab world.

Analysts say that is a long shot, not least because Trump would have to exert extreme pressure on an unwilling Israeli Prime Minister Benjamin Netanyahu to end the war in Gaza, whereas the American president said on Monday he was “not confident” that the three-phase ceasefire agreement that went into effect on January 19 would be upheld by Israel and Hamas.

However, Trump told reporters at the same press conference he expected Israel and Saudi Arabia to establish formal diplomatic relations “soon”, if not by the end of this year.

In an interview with Fox News on Wednesday, Trump’s Middle East envoy Steve Witkoff acknowledged the challenges of negotiating an end to the Israel-Gaza conflict during the envisioned second 42-day phase of the ceasefire. But he expressed optimism that the truce would bolster the chances of normalising Israel’s relations with Arab states like Qatar, which has played a key mediating role in the conflict.

He also shocked many observers by suggesting Washington could for the first time directly engage with Hamas as a step towards achieving Trump’s wider objective for the Middle East.

“I think you could get everybody on board in that region. I really do. I think there’s a new sense of leadership over there,” Witkoff said.

Source:scmp

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Economic

The new US Secretary of State Marco Rubio’s assurance of an “ironclad commitment” to its oldest military ally in Asia, the Philippines, was welcomed on Thursday by analysts, but they suggested this would all depend on US President Donald Trump, who appeared to have softened his stance on China.

In one of his first acts as the country’s chief implementer of Trump’s foreign policy, Rubio phoned Philippine Foreign Secretary Enrique Manalo on Wednesday to “underscore” Washington’s “ironclad commitments to the Philippines under our Mutual Defence Treaty [MDT]”, according to state department spokeswoman Tammy Bruce.

Rubio and Manalo talked about “issues of mutual concern, including [China’s] dangerous and destabilising actions in the South China Sea”, Bruce disclosed, adding that Rubio had said Beijing’s behaviour “undermines regional peace and stability and is inconsistent with international law”.

Bruce made no mention of the two discussing the trilateral security arrangement among the US, Japan and the Philippines, which was a last-minute initiative of former US president Joe Biden.

Earlier, Rubio also met his fellow foreign ministers of the Quad – Australia, India and Japan – and the officials in a joint statement said they “strongly oppose any unilateral actions that seek to change the status quo by force or coercion in the Indo-Pacific region”.