Schroder Salomon Smith Barney is recommending clients enter interest-rate swaps in which the customer wins if Polish interest-rates fall and Czech interest rates rise. Poland's central bank is expected to cut interest rates further next month as the threat of inflation has diminished, while the spread between short-dated Czech and euro interest-rate swaps likely will widen as interest rates in euro-land and the Czech Republic diverge.
Darrell Tonge, v.p. emerging market strategist at SSSB in London, said emerging market investors that invested in Greece before it joined the single currency in January have been snapping these trades up.
SSSB is recommending investors enter a forward-starting swap in which they receive the Polish five-year swap rate--starting in five-years--and pay the equivalent Czech interest-rate, Tonge continued. The Polish mid-market five-year swap rate--starting in five years--was 858 basis points, or 269bps over the equivalent euro curve on Tuesday. The Czech mid-market five-year swap rate--starting in five years--was 96bps, or 686bps over the equivalent euro curve.
Tonge predicts the 165bps spread between the Polish and Czech interest rates will narrow to 50-75bps over the next year. In particular, the Polish 28-day intervention interest-rate likely will fall 350-500bps over the next 12 months, he continued. Meanwhile economic growth has picked up in the Czech Republic, which may cause investors to start worrying about inflation. While Czech interest rate hikes are unlikely, Tonge predicts the market will price rate rises into the long end of the curve, causing the spread with the euro curve to widen.
