Serbian 3-Year Bond Yield Drops as Kosovo Deal Boosts EU Chances

Yields on Serbian three-year bonds fell as investors bid more than offered in the first sale after the government reached an agreement with Kosovo that brings both countries a step closer to European Union membership.

Yields declined 0.9 percentage point to 10.49 percent as investors bought 10 billion dinars ($116.6 million) of three-year bonds, which carry a 10 percent coupon, according to an e-mailed statement today from the Debt Management Agency in Belgrade. Investors bid 14.3 billion dinars, it said.

“Frontier markets are ironically a safe place to be these days, if you can, of course, cope with the poor liquidity, small markets, and exotic places,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA in London, according to an investor note published today. “We like exposure to Serbia, not only on the FX side, but on the cash bond side as well” and “particularly” the three-year bonds.

The Balkan nation’s debt yields have fallen since the European Commission said yesterday that Serbia and Kosovo deserved to move closer to 27-nation bloc after they agreed to improve relations.

Yields Fall

Yields on Serbia’s 10-year benchmark Eurobond maturing in 2021 eased 2 basis points to 5.053 percent at 2:47 p.m. in Belgrade, after a 15 basis-point fall yesterday. The dinar traded at 111.3080 against the euro at 2:58 p.m., little changed on the day, according to data compiled by Bloomberg.

“The agreed deal increases the chances of Serbia getting a date from the EU in June,” Naz Masraff, London-based analyst at Eurasia Group, said in a note to investors. “But the EU, and in particular Germany, will certainly want to see actual implementation on the ground before granting a date,” which could be set in December, or the first half of 2014, “conditional on and linked to the implementation of the agreement.”

The commission gave the two sides have until June 15 to work out power sharing in telecommunications and energy and make progress in clarifying the fate of people missing in both nations since a 1998-99 war.

Societe Generale’s Anne said Serbia’s accord with Kosovo will “provide a boost to the EU membership talks, which could be massive as a signal for Serbia’s status as a place to invest.”

Today’s auction yield was below the bank’s 10.70 percent to 11 percent forecast.

An International Monetary Fund mission arrives for talks and a review of Serbia’s economic policies and monetary and fiscal performance on May 8, five days before the National Bank of Serbia meets to discuss interest rates after keeping borrowing costs unchanged at 11.75 percent for two months on slowing inflation.

Serbia should ask the IMF for a three-year precautionary loan to boost investor confidence, central bank Governor Jorgovanka Tabakovic, attending the spring meetings of the IMF and World Bank in Washington, told state-run Tanjug news agency.

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