* The spread between long end Hungarian government bonds and Polish government bonds (10y) has widened to around 6M high at around 150bp. From this perspective the long end HGB looks relatively attractive but given the average spread over a longer period is around 130bp, in stdev terms the current cheapness is only 0.5stdev. (chart 1)
* From supply perspective both countries are in a comfortable position: Poland has covered about 75% of its 2011 gross borrowing need whilst Hungary covered around 70% YTD. Poland has already cut the long end POLGB auctions, Hungary still keeps it unchanged but in case market pressure intensifies they also have the flexibility to cut.
* Non-resident positioning: non-resident positioning increased significantly in H1 in both countries but we estimate it is only close to M/W in Hungary whilst in case of Poland non-resident positioning is significant O/W in our view. (char 2).
* Correlation versus long end Bunds: given HGB is more of a risk proxy trade the correlation of 10y HGB vs. 10y Bund is negative (bund sell-off is good for HGB), current 3M rolling correlation is around negative 0.4. In case of Poland POLGBs tend to correlate positively with Bunds but currently the 3M rolling correlation is around zero.
* Correlation versus own FX: HGB is a much more FX driven market than the POLGB market. HGB vs. EUR/HUF correlation is about 0.65 whilst the same in Poland is only 0.3. The recent rally in HUF however did not have a significant impact on HGB yields and hence some value opened up in our view. (chart 3 and 4)
* Valuation versus swaps: on ASW basis the POLGB long end curve is about 1.5/2stdev rich versus the IRS curve. The same measure in Hungary shows that long end HGBs are about 1.0/1.5stdev cheap versus the IRS curve: (chart 5 and 6)
*Monetary policy direction: Hungary is in a wait and see mode but in case appreciation pressure on HUF intensifies (coupled with some slowdown in global economy) we would not rule out NBH returning to the easing cycle. Poland is going to have rate setting meeting today, where we expect unchanged rates in line with market consensus. Given we see the Polish underlying inflation pressure much stronger than the Hungarian we would still not rule out another hike in Q4 2011.
*Bottom line: long end HGB cheapened up recently vs. long end POLGB but from historical perspective it is not a screaming buy yet. Supply pressure is similar in both countries, but non-resident positioning is much heavier in Poland. From monetary policy perspective we see the NBH being more dovish than the NBP (but we expect unchanged rates from the later tomm). Given HGBs are much more risk appetite and FX driven for yield tightening one need a relatively stable global backdrop. In the current environment we maintain our more constructive view on HGBs vs. POLGB and see value in buying 2022/A HGB at current levels for a potential 30-40bp yield compression. For POLGB we would use the current rally to reduce positioning slightly.
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UniCredit Research
UniCredit Corporate and Investment Banking Unicredit Bank AG