* Foreign issues ease stress on local Polish, Czech markets
* Interest rate cuts to boost Hungarian, Romanian bonds
* Elections, fiscal weakness pose threats
By Kuba Jaworowski and Jason Hovet
WARSAW/PRAGUE, Feb 5 (Reuters) - Domestic bond yields in
central Europe have room to drop more in the first half of 2010
as the Poles and Czechs balance record borrowing with more
foreign debt issues and Hungarian and Romanian rates fall.
Strategists and fund managers expect the Poles and Czechs,
with low foreign debt levels, to keep domestic markets off
balance by issuing internationally more often, reducing local
supply and cutting pressure on domestic yields.
And in Hungary and Romania, where monetary easing was
delayed last year in financial market turmoil, further interest
rate cuts expected in the first part of the year will keep bonds
attractive, mainly on shorter maturities.
Governments in the ex-communist region have been wary of
foreign debt in the past, worried by the risk that repayments
could soar if their currencies fell.
But the zloty, crown and leu all corrected sharply against
the major currencies after Lehman Brothers collapse in 2008 and
strong growth prospects and lower debt burdens now make most
look like convincing bets compared to many euro zone borrowers.
Poland's strategy has already paid off. It was the first in
the region to sell foreign-currency debt this year by placing 3
billion euros in 15-year bonds in January.
Two days after the issue, bids reached a record high at a
domestic bond auction, pushing yields down 5 basis points.
"Foreign issuance will help, and that will mostly likely
lower yields or put a cap on local denominated bonds," said
Michail Diamantopoulos, a fund manager at Investec Asset
Management, with $6 billion in emerging markets debt funds.
"We like the long end in Poland for the good fundamentals
and flows supporting bonds."
Some analysts have forecast the 10-year Polish bond yield to
fall around 30 basis points in the first half from 6.1 percent.
Warsaw expects more foreign bond issues this year even after the
January sale met 2010 foreign debt plans.
It plans to issue around 200 billion zlotys overall this
year, up from about 160 billion in 2009, to help meet an
expected doubling of the central state budget deficit.
The Czechs have remained coy. Finance Minister Eduard Janota
said this week the country may issue only 1-2 billion euros
worth of foreign bonds in 2010, below the ministry's ceiling but
on par with 2009. []
But last month a debt official said the Finance Ministry was
mulling $2 billion in dollar bonds in the first half, along with
a 1 billion euro euro bond, which would cut domestic supply.
RATE STORIES
Like the Poles, Czech policymakers are expected to raise
interest rates in the second half of the year, with markets
pricing in up to three rate hikes by the end of 2010.
Analysts expect monetary policy to be the biggest driver for
Hungary and Romania, among the worst-hit in the crisis. But
they, too, are using foreign debt markets.
Hungary sold $2 billion worth of 10-year debt in January,
but Finance Minister Peter Oszko has said the country was not
likely to return to foreign markets again this year after
relying mostly on International Monetary Funds last year.
Romania, another IMF beneficiary, plans to issue a 1.5
billion euro bond delayed by political wrangling last year.
Their central banks -- after delaying monetary easing in
2009 amidst capital market jitters -- are playing catch up with
peers to cut the cost of borrowing and stimulate growth.
Esther Law, a Societe Generale fixed income strategist, said
subdued issuance as Hungary moves back to market financing also
supported views on Hungary bonds.
"With this, together with further rate cut potential, I like
the shorter end," she said. Hungarian 3-year yields have dipped
below 7 percent. Analysts say they could hit 6.5-6.7 percent.
Investec's Diamantopoulos said longer-dated Hungarian bonds
may still come under pressure.
"We prefer positioning for a steeper curve," he said.
"Hungary's fiscal numbers have improved a lot, but there is a
lot of risk premium that needs to priced into the curve."
ENTRY POINT
The risks to the region in months ahead are chiefly from
parliamentary elections in the Czech Republic and Hungary in the
spring, along with a Polish presidential poll in the autumn, as
well as the impact of Greece and other euro zone economies
troubles on broader risk appetite.
The region also still trails Asian developing economies in
inflows of funds this year, making the recovery less stable.
Polish and Czech spreads over Bunds are about 100 basis
points higher today than before Lehman Brothers' collapse. The
Hungarian spread -- which has always been higher -- has fallen
and is now unchanged, while Romania's spread is about 100 basis
points lower.
Poland, the only country in the EU to have recorded growth
last year, remains the main target for investors. Both the rate
outlook and the fact that foreign issues tend to be of longer
maturities, point to support for longer-dated domestic bonds.
"When foreign issues draw a lot of investor interest than it
boosts sentiment around Polish debt as a whole as it shows that
worries over financing the borrowing needs are exaggerated,"
said Ewa Radkowska a fund manager at ING PTE.
(Editing by Patrick Graham)
