* Hungary holds interest rates as expected
* Romania sells slightly more than planned at 6-mo tender
* Polish bonds retreat ahead of switch tender due Wednesday
(Adds Hungary cbank, Romania tender)
By Dagmara Leszkowicz and Marius Zaharia
WARSAW/BUCHAREST, Aug 23 (Reuters) - The Hungarian forint
weakened on Monday after central bank warnings about risks
related to inflation and the state budget, while Romania sold
slightly more than planned at its six-month T-bills tender.
Hungary's central bank held borrowing costs at a record low
of 5.25 percent for the fourth month running as expected.
But it warned that government commitment to keep the budget
deficit within sustainable limits was key to retain investors'
confidence after the suspension of talks with the International
Monetary Fund and the European Commission earlier this year.
It also signalled a growing chance that inflation would
overshoot its target due to rising fuel and food costs despite a
struggling economy and said it may need to hike rates if price
pressure persisted or investors' concerns grew. []
The forint <EURHUF=> fell from 281.33 to 282.43 per euro
after the comments, a reaction not matched by peers. The unit
led regional losses with a 1.2 percent fall on the day.
Bonds failed to react as they were already weakened by
profit-taking following a rally last-week. However, the risks
highlighted by the bank do not encourage a quick return to gains
in debt markets, dealers said.
"The rate decision did not have any strong direct impact but
(the comments are) not bond positive, especially as the forint
also weakened," a bond trader in Budapest said.
Investors snapped up regional bonds last week as record lows
hit by German Bund yields drew attention to the high premiums
that emerging economies with relatively positive fundamentals
such as Poland and Turkey are offering.
Yields rose 10 basis points in Hungary on Monday and inched
up in Poland, after a fall of up to 28 basis points last week.
Trade was thin as markets eyed the Polish central bank's own
meeting this week.
Markets expect Poland to leave rates flat, but will watch a
new regime at the bank closely given expectations that it will
hike borrowing costs by 25 basis points by the end of the year.
"There is slight profit taking on the bonds market," said
Krzysztof Izdebski, dealer at PKO BP, adding that papers may
weaken ahead of a Wednesday switch tender. "Additionally ...
comments about potential rate hikes are not ruled out."
ROMANIA TENDER
Romania sold slightly more than planned in six-month
treasury bills at the finance ministry's self-imposed 7 percent
yield cap, but analysts said short-term paper would only boost
funding needs. []
Six-months is the longest maturity the ministry managed to
sell under its plans this month, due to its tactic of rejecting
yields higher than 7 percent.
"This shows the shortcomings of their current strategy,"
said Vlad Muscalu, an economist at ING Bank Romania. "Their
funding needs will be higher at least in the first half of next
year and this will put even more upward pressure on yields."
By 1413 GMT, the Polish zloty <EURPLN=> fell 0.6 percent on
the day, while the Czech crown <EURCZK=> and the Romanian leu
<EURRON=> were virtually flat.
The euro, the region's main reference currency, moved back
towards its all-time low against the Swiss franc on Monday.
That does not bode well for Hungary and Poland, where a
large chunk of household loans are denominated in the Swiss
currency.
--------------------------MARKET SNAPSHOT--------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2010
Czech crown <EURCZK=> 24.79 24.826 +0.15% +6.16%
Polish zloty <EURPLN=> 4.001 3.977 -0.6% +2.57%
Hungarian forint <EURHUF=> 282.43 279.03 -1.2% -4.28%
Croatian kuna <EURHRK=> 7.273 7.28 +0.1% +0.5%
Romanian leu <EURRON=> 4.226 4.225 -0.02% +0.27%
Serbian dinar <EURRSD=> 105 104.627 -0.36% -8.69%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
2-yr T-bond CZ2YT=RR +3 basis points to 120bps over bmk*
7-yr T-bond CZ7YT=RR -1 basis points to +118bps over bmk*
10-yr T-bond CZ9YT=RR -2 basis points to +116bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR 0 basis points to +394bps over bmk*
5-yr T-bond PL5YT=RR +3 basis points to +374bps over bmk*
10-yr T-bond PL10YT=RR -3 basis points to +306bps over bmk*
Hungarian treasury bonds <0#HUBMK=>
3-yr T-bond HU3YT=RR +10 basis points to +586bps over bmk*
5-yr T-bond HU5YT=RR +1 basis points to +535bps over bmk*
10-yr T-bond HU10YT=RR +8 basis points to +463bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1513 CET.
Currency percent change calculated from the daily domestic
close at 1600 GMT.
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(Reporting by Reuters bureaus, writing by Dagmara Leszkowicz
and Marius Zaharia; Editing by Patrick Graham)
