Where to find bond spreads higher than in Asia or LatAm

Investors can take advantage of wider bond spreads in some countries in Central and Eastern Europe despite their lack of growth, a strategist says

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Investors have crowded into emerging markets’ debt over the past year, pushing yields down, but some Central and Eastern European bonds still offer better returns than other emerging countries, according to Demetrios Efstathiou, head of CEEMEA strategy at RBS.

Z-spreads – spreads over the swap curve in US dollars or in euro if the country does not have 10-year issuance in US dollars – for countries like Poland, Romania, Turkey, Hungary and Serbia were much higher than the ones for Brazil, Mexico, Peru and Colombia in Latin America or fast-growing Indonesia and the Philippines in Asia, an analysis by RBS showed.

Z-spread calculations take into account all the cash flows of a bond, calculating the spread over the swap curve for each and every cash flow and they are “a much more accurate spread than the maturity or duration spread,” Efstathiou said.

“I think there is a reason for spreads to be wider [in CEE], fundamental reasons why spreads should be wider, like the lack of growth; but that’s where investors can find value, because despite the lack of growth some of these countries in Central and Eastern Europe will still be stable and therefore investors will be able to get their money back,” he told Emerging Markets in an interview.

“So I think the spreads will remain higher but at the same time they will give better carry, overall better returns. You get paid for your extra risk.”


Efstathiou noted that overall countries in the region do not have very high debt to GDP ratios, with the exception of Hungary, and their fiscal deficits are under control.

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“The region needs a better external environment for these dynamics to become better,” he said.

The main risk for these countries, whose fate is tightly tied with that of the eurozone, is a worsening of the situation in the single currency area, or if an eurozone member state elects a government that wants to take the country out of the single currency, Efstathiou said.

But they also have their individual risks.

“Slovenia has a political crisis right now, a lot depends on how that gets resolved,” he said. “Serbia needs to take a lot of fiscal measures to stabilize, we have to wait and see how that plays out.”

The two biggest countries, Poland and Romania, are stable and while Poland offers low yields, Romania’s are higher because it is perceived as more risky.

“The Czech Republic is stable, but it doesn’t pay you,” Efstathiou said.

“Hungary is a big question mark, with a new central bank governor now who has just been appointed. It remains to be seen how the Hungarian government will turn around a very negative investment environment,” he added.

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