JPMorgan Sees Limited Extra Demand for Romania Debt on Index

Extra demand for Romanian debt stemming from inclusion in an emerging-market bond index will be limited as investors have already boosted their holdings by $3.5 billion through January, JPMorgan & Chase & Co. said.

The U.S. bank, which will incorporate three Romanian leu-denominated fixed-income securities in its GBI-EM index over three months starting March 1, had estimated total inflows of $2 billion amid the inclusion, according to a research note sent to clients today.

“Investors have already increased their exposure to Romanian bonds and we expect extra demand from index inclusion to be limited,” JPMorgan said in the note. “The potential future inclusion of additional Romanian bonds in the index, which depends on liquidity, may add to further demand.”

Leu-denominated bonds and the currency have rallied since January after JPMorgan said three of the country’s local notes are eligible for index inclusion. Eleven Romanian notes are also eligible for entry to a Barclays Plc emerging-market index, according to e-mailed comments from Societe Generale SA.

The leu strengthened 0.3 percent to 3.3428 per euro by 7:53 p.m. in Bucharest. It has gained 2.1 percent against Europe’s common currency this year, the seventh-best performance among more than 20 emerging-market currencies tracked by Bloomberg. The yield on Romania’s January 2016 bonds slid to 5.73 percent at an auction on Feb. 14, compared with a rate of 6.03 percent at a similar-maturity sale on Jan. 10.

Foreign Holders

Foreign investors’ holding of Romanian debt rose to more than 20 percent in February from 5 percent in November, according to JPMorgan.

The increased interest from international investors helped the Finance Ministry raise a record 11.4 billion lei ($3.4 billion) of local debt in January in addition to 503 million euros ($655 million) of bonds also sold domestically. It also raised 4.03 billion lei last month, more than the 3.7 billion lei planned.

Romania’s October 2015, January 2016 and July 2017 leu bonds are eligible for the JPMorgan index, phased in over a three-month period concluding on May 1, JPMorgan said in the note. Their final expected weight in the GBI-EM Global Diversified index is 0.87 percent, it said.

That compares with the country’s current weight of 0.29 percent, Patrick Burton, a spokesman for the bank, said in an e-mailed response to questions from Bloomberg News.

JPMorgan raised its estimate for Romania’s economic growth to 1.5 percent this year from 0.8 percent, adding that it sees risks from the “uncertainty around a new deal with the International Monetary Fund.”

(Updates with leu and bond performance in fourth paragraph, foreign holdings in sixth, index weight in eighth.)
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