The correction in CEE long-end bonds has been significant and the baseline risks are more balanced now. Bunds have shaken up some of the long positioning in CEE local debt. However, concerns remain and we could look for further weakness before considering duration extension or long-end receivers again. In particular, the weakness in Greece and Peripheral Europe adds to the pressure from Bund weakness.BofA Merrill Lynch says “We cut our long duration bias in CEE to neutral and closed our 10y receiver in Hungary. We moved to a 2y receiver (1.85) in Hungary given the scope for curve steepening and also added a 2v5 steepener (46bp) in Poland. We also recommended reducing some exposure in the more expensive CEE credits in favor of switches to the laggards.”The key argument for steepeners remains based on higher euro area inflation expectations plus better activity and sentiment data both locally in CEE and in the euro area. Actual headline inflation is also at/past the low point for y/y rates.
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