* Yuan news drives zloty to 1-month high, other FX up
* Romania sells a quarter of planned bills at tender
* Hungary c.bank holds fire, gives no signal on future moves
(Recasts, updates prices, adds detail, quote)
By Jason Hovet and Marius Zaharia
PRAGUE/BUCHAREST, June 21 (Reuters) - Romania sold only a quarter of its planned T-bill issue on Monday as debt yields remained high despite market gains across Central Europe after China said it would be more flexible about its yuan.
Central Europe has struggled against worries the euro zone's debt crisis would spread, despite lower debt and better growth prospects, but volatility has dropped slightly in the past week, raising asset prices.
Debt tenders have stayed under pressure from rising yields, however, and Romania's average yield jumped 56 basis points to 6.85 percent on Monday.
Analysts said the ministry was signalling a strategy of only accepting yields below 7 percent, which was a risk and might prove impossible to keep up as funding needs pile up.
Dealers also said "heavy" central bank liquidity management in recent weeks to protect the leu currency from weakening due to fiscal woes affected local demand for Romanian paper.
Many of Romania's auctions have failed or fallen short since May 6, when it announced an austerity plan to meet conditions of its IMF loan. Investors are wary the cuts may not go as planned. [
]."I don't think they will manage to sell more at these levels even if the IMF tranche is disbursed," a trader said. "There are sovereign woes all across Europe."
Central European stocks and currencies generally firmed on Monday after China's announcement, which led to the yuan rising to its strongest point since July 2005, giving a boost to risk appetite that analysts said would help kick-start more appreciation in central Europe. [
]By 1454 GMT, stock markets had risen up to 2.6 percent led by Budapest <
>, and the Thomson Reuters Equity Emerging Markets Europe Index <.TRXFLDEETU> had gained 1.2 percent.Hungary left interest rates at a record low of 5.25 percent as expected on Monday. The forint <EURHUF=> rose 0.4 percent and its strength lifted bond prices, pushing short-term yields down by 18 basis points, despite no signals about the possibility of further rate cuts. [
]"Yields fell, pushed down by buying from one domestic player, but I don't feel a real breakthrough," said on trader, adding that thin volumes exacerbated the move.
Recent volatility in central European markets have prompted some foreign investors to stay on the sidelines, tightening liquidity conditions in the region.
Yields were down at least 10 basis points since a debt auction last week, which was well-covered, despite uncertainty over how Hungary's fiscal tightening plans would work out given the announced tax cuts.
Romania's leu <EURRON=> was 0.3 percent up, while the Czech crown <EURCZK=> edged down.
POLISH ELECTION
In Poland, acting president Bronislaw Komorowski won a first round of a presidential ballot on Sunday, but faces a tight runoff vote against Jaroslaw Kaczynski, twin brother of the former president killed in a plane crash in April.
A Komorowski win in a July 4 runoff will likely be cheered by markets, because investors fear Kaczynski may use his right to veto to block fiscal reforms. [
]The likely tight result pushed yields up 3-6 basis points, but the zloty <EURPLN=> jumped 0.4 percent on the yuan's rise.
Analysts said China's decision could help growth in export-heavy emerging European countries, which are part of the supply chain for euro zone states whose goods will become cheaper in Asia because of the stronger yuan.
"The outlook still depends on recovery in western Europe and central banks in the region," said Ulrich Leuchtmann, head of FX research at Commerzbank, who doubted the yuan news would have much of a lasting effect.
Societe Generale's emerging market strategist Murat Toprak said declining volatility will lead to short-covering that will benefit the region. He targets the zloty at 3.95 to the euro and the forint at 270 per euro in two to three weeks. --------------------------MARKET SNAPSHOT-------------------- Currency Latest Previous Local Local
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today in 2010 Czech crown <EURCZK=> 25.76 25.737 -0.09% +2.17% Polish zloty <EURPLN=> 4.038 4.054 +0.4% +1.63% Hungarian forint <EURHUF=> 278.17 279.29 +0.4% -2.81% Croatian kuna <EURHRK=> 7.2 7.2 0% +1.52% Romanian leu <EURRON=> 4.229 4.24 +0.26% +0.2% Serbian dinar <EURRSD=> 103.51 103.527 +0.02% -7.37% Yield Spreads Czech treasury bonds <0#CZBMK=> 2-yr T-bond CZ2YT=RR -8 basis points to 145bps over bmk* 7-yr T-bond CZ7YT=RR -6 basis points to +156bps over bmk* 10-yr T-bond CZ9YT=RR -4 basis points to +148bps over bmk* Polish treasury bonds <0#PLBMK=> 2-yr T-bond PL2YT=RR +1 basis points to +409bps over bmk* 5-yr T-bond PL5YT=RR +2 basis points to +371bps over bmk* 10-yr T-bond PL10YT=RR -2 basis points to +310bps over bmk* Hungarian treasury bonds <0#HUBMK=> 3-yr T-bond HU3YT=RR -19 basis points to +614bps over bmk* 5-yr T-bond HU5YT=RR -11 basis points to +558bps over bmk* 10-yr T-bond HU10YT=RR -7 basis points to +478bps over bmk* *Benchmark is German bond equivalent. All data taken from Reuters at 1754 CET. Currency percent change calculated from the daily domestic close at 1600 GMT. For related news and prices, click on the codes in brackets: All emerging market news [
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