Investors should buy Russian and Hungarian bonds denominated in local currencies and sell Polish debt as yields are set to decline further because of interest- rate reductions, Bank of America Merrill Lynch said.
“In both markets, we see scope for further declines in yields on rate cuts,” David Hauner, an emerging-markets fixed- income strategist wrote today in an e-mailed note. “We expect euro-zone and U.S. rates to drift higher in the medium term,” they said, adding that “Russia and Hungary stand out.”
Traders have increased bets on interest-rate reductions in both nations after leaders placed allies at the helm of their central banks. Merrill Lynch forecasts 75 basis points of rate cuts in Russia and 125 basis points in Hungary, Hauner wrote.
Russian President Vladimir Putin named Elvira Nabiullina, his adviser and a former economy minister, as the next head of Bank Rossii starting in June. The refinancing rate, which is currently at 8.25 percent, will fall to 8 percent in the second quarter of 2014, according to the median estimate of 10 economists surveyed by Bloomberg.
The Magyar Nemzeti Bank, which reduced its benchmark rate in seven consecutive steps to 5.25 percent in February, matching a record low, may trim rates further after the appointment of Gyorgy Matolcsy, a former economy minister, as central bank president. Derivative traders are betting the rate will fall by 94 basis points percent in the next six months, based on the difference between six-month forward-rate agreements and the three-month Budapest Interbank offered rate.
There’s “a low chance” Poland’s main policy rate will fall to less than 2.75 percent from 3.25 percent at present, Hauner wrote.
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