Fed Augments Ukraine Pain as Europe Bond Volatility Jumps

Bond price swings from Poland to Hungary and Romania are surging as speculation the Federal Reserve will shorten its timetable for raising rates adds to the economic fallout from the crisis in neighboring Ukraine.

Ten-day volatility for Polish and Hungarian 10-year government debt climbed to the highest level in 13 months today, with Romania rising to the most since at least June 2011 yesterday, according to data compiled by Bloomberg. The yield on the zloty security jumped 30 basis points from a 13-month low in the last three days of last week, only to fall 10 basis points this week. Equivalent forint bond yields added 70 basis points since July 29 and leu notes 43 basis points.

An accelerating U.S. economy is raising concern that near-zero interest rates, which fueled demand for higher-risk assets including east European bonds, will end sooner than investors envisaged. At the same time, the escalating conflict in Ukraine is weighing on the growth prospects of the former-communist nations, boosting market volatility.

“Central and East Europe has become a dangerous spot,” Peter Schottmueller, who helps manage $17 billion in debt as head of emerging-market fixed income at Deka Investment GmbH in Frankfurt, said by e-mail yesterday. “If there is risk off due to geopolitical reasons, a change in expectations about the Fed or a macro shock, it’s very likely all markets will suffer.”

U.S. Expansion

East Europe’s local-currency sovereign bonds lost 3.1 percent in dollar terms since July 29, a day before data showed U.S. gross domestic product grew at a faster-than-forecast 4 percent annual rate from April to June. Emerging-market notes fell 1.2 percent in the period, Bloomberg indexes show.

“The strong GDP reading influenced global sentiment on emerging markets,” Marcin Karasiewicz, a Warsaw-based fixed-income trader at PKO Bank Polski SA, said by e-mail yesterday. Volatility may remain high in the near term, he said.

The Ukrainian crisis will slow eastern European economies as the U.S. and the EU expand restrictions on Russia and President Vladimir Putin weighs his response to sanctions, according to Peter Attard Montalto and James Burton, emerging-market analysts at Nomura International Plc. in London.

“While the growth effects so far have been very limited, the hit really is still to come and will be meaningful,” they wrote in a note yesterday.

‘Opposing Factors’

German factory orders dropped by the most in more than 2 1/2 years amid tension with Russia, a report showed yesterday. European Central Bank President Mario Draghi said the risks to euro area recovery from conflicts including that in Ukraine are increasing.

The Ukraine turmoil and Russian bans on fruit and vegetable imports from Poland will reduce GDP by 0.6 percentage point this year, Economy Minister Janusz Piechocinski said Aug. 1. The government’s 3.8 percent growth target for next year may also be reduced, he said yesterday.

Volatility is set to “continue until there is more clarity about 2015 growth and the inflation outlook,” Richard Segal, an international credit strategist at Jefferies International Ltd. in London, said by e-mail yesterday.

Implied volatility of the region’s currencies rose this month as NATO and Poland warned Russia may invade Ukraine.

“Volatility was unusually low for a while and it had to rise as the Fed and the Russia-Ukraine conflict increase uncertainty,” Demetrios Efstathiou, London-based head of Central and East Europe, Middle East and Africa strategy at Standard Bank Group Ltd., said by e-mail yesterday. “The two opposing factors are very much at play here.”

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