SEE Weekly Analyst: Tajana Striga Above expected kuna bond issue?
[email protected] +385 1 6033 522 SEE yields mixed Fed left monetary policy unchanged with key interest rates unchanged in line with market expectations. However, statement released after meeting was more cautious than expected whereby Fed members acknowledge improved consumer and business sentiment, but stays dovish on inflation still below 2% long-term target. All in all, until newly elected US president Trump details his planned fiscal expansion, the markets currently expect only two rate hikes in 2017, while FOMC baseline remains three rate hikes. Despite that, SEE yields saw rather modest moves this week, with Slovenian and Croatian USD yields down 9bp and 6bp, respectively, and Serbian USD yields barely rose by 4bp. Euro yields stayed unchanged in Slovenia and rose 4bps in Croatia. Locally, investors’ focus is on the next week's bond auction in Croatia, including two issues in kuna with 5Y and 11Y maturities. Given the generous HRK17bn excess liquidity and potential ECB tapering later this year, we expect the MinFin to issue in excess of HRK5.5bn maturity and place HRK7-8n to strengthen cash reserves ahead of the upcoming USD bond maturity. Subdued banks’ credit activity and new European rules on sovereign debt risk requirements also bode well for demand as well as recent S&P (- and Fitch) rating outlook upgrade from negative to stable that led to some 15bp spread tightening since then. We see 5Y and 11Y yields just below 2% and 3%, respectively, with the former subject do downside risks as the future buying conduct of ECB may shift meaningfully towards the sub 5Y sector and the CNB may resume easing focused on the medium part of the yield curve.