Croatian Eurobonds Print another Spread Contraction as Global Growth Concerns Put a Lid on Yield Rise

This new year’s flow (at least so far) has been bearish on global growth prospects as many of the major economies are near full capacity and there does not seem to be any indication of US and China reaching a trade agreement any time soon. What does this all mean for Croatian USD yields?

Recent couple of months have been quite supportive for Croatian yield curves – since beginning October, the global macroeconomic backdrop has shifted in favour of slower GDP growth around the world. The slowest Chinese GDP growth in three decades, IMF downgrading it’s global GDP growth rate forecast, analysts cutting their earnings forecast for US companies etc. have all been indicating that even a recession might be under way – as a matter of fact, JP Morgan’s Real Time Quant Econ. Monitor puts the recession probability in the next twelve months at 44% (versus 34% a month ago).

In response to global markets seeing a possible recession on the horizon, fixed income yields went down and equities sold off; currently, the anticipation of a trade deal between US and China and the possible end of US government shutdown give hopes to the investors that a rebound might be under way. It’s interesting to note that Croatian risk premium tightened meaningfully in the aftermath of yields dropping. The spread tightening was most pronounced on CROATIA 2020 USD – just days before Christmas the paper could be bought @ 3.89% YTM, US curve + 112.8bps, while this morning the paper is traded @ 3.43% YTM, US curve + 66.7bps. It’s also worth bearing in mind that the yield contraction/spread tightening was more intense on the longer end of the curve, meaning that the Croatian USD curve effectively went through a bull steepening period. Speaking about the benchmark (USD) curve, since the beginning of the year 2Y10Y spread has been hovering between 15bps and 20bps values, as growth forecasts mentioned in the first paragraph put a lid on rising long-term yields. Additionally, the FED fund futures curve prices no further rate hikes this year, while the first cuts might come about in 2020.

What’s all that have to do with Croatian yields? Well, the current lack of supply means that the backdrop was certainly supportive for Croatian fixed income prices, but it’s difficult to estimate what the future has in store. One date to remember for Croatian sovereign paper is 22nd March, 2019, when S&P Global Ratings is scheduled to review the Croatian sovereign rating (currently at BB+, with a positive outlook). Nevertheless, even the possible rating increase might not drive yields significantly lower as the supply is still scarce and most of the long dated paper is difficult to obtain in larger quantities.

Ivan Dražetić, CFA
Category : Blog

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