Bonds Rally in Europe’s East as Brexit Vote Spurs Stimulus Bets

  • SocGen recommends investors buy Poland’s 10-year bonds
  • Traders return to price in potential rate cuts in Warsaw

Bonds in emerging Europe rallied on speculation the U.K.’s departure from the European Union will force central banks to ease monetary conditions to support their economies.

Yields on Poland’s 10-year local-currency debt dropped 10 basis points, the most in more than a week, to 3.08 percent, while the rates on similar-maturity Hungarian and Romanian bonds also declined. Traders have returned to pricing in the possibility that Polish policy makers will resume a cycle of interest-rate cuts after keeping the benchmark at 1.5 percent since March 2015.

The EU’s eastern member states are among the most vulnerable to the so-called Brexit because they are recipients of financial support from the bloc, and Britain is the third-biggest contributor to the EU budget. The possibility that the U.K. vote will hamper economic growth in the euro zone is fueling speculation the U.S. will delay interest-rate hikes and the European Central Bank will provide more stimulus.

“This is a reflection of markets’ expectation of the need for more policy accommodation globally,” Roxana Hulea, an emerging-market strategist at Societe Generale SA, who recommends clients to buy Polish 10-year bonds. “Lower-for-longer interest rates in developed markets and more liquidity over all bode well for duration products in Central and eastern Europe.”

Rate Outlook

Yields on 10-year Hungarian debt fell nine basis points to 3.26 percent, while the rate on Romanian notes decreased six basis points to 3.70 percent by 1:09 p.m. in London.

Unlike Poland, Hungary has been reducing its benchmark interest rate since February, bringing it to 0.9 percent from 1.35 percent. Polish twelve-month forward-rate agreements fell 15 basis points below the Warsaw Interbank Offered Rate on Monday, reflecting the biggest wagers for rate reductions in more than a month and down from six basis points on Friday.

French asset manager Amundi is “selectively” receiving central and east Europe’s rates as it expects Brexit to spur further policy accommodation by central banks, Abbas Ameli-Renani, a global emerging-market strategist, said in an interview on Monday.

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