By: The Quinnipiac University Economics Research Team, Niamh Savage
Source: Eurostat and own calculations. Daily EMU convergence criterion bond yields (i.e., central government 10-year bond yields).
Throughout this time period, there was a large normalization in the interest rates of CEE currencies. However, Slovakia did not follow the trend of normalization; Slovakia had the greatest variation, in percentage terms, and they had a large decline in interest rates (pink line). This is consistent with the prior week’s findings, and it suggests a continuing increase in demand for the bonds. Therefore, this is still the country to watch. The broad trend, on July 02, was a dispersion of currencies. Czechia, Hungary, Poland, and Slovakia showed a decline in the interest rates. The Romanian Leu (yellow line) showed a small increase in interest rates, and a decrease in the demand for their bonds.
A first thought on the possible reasons for Slovakia’s unique behavior is that it is the only country of those covered which is already on the Euro. Whether this means local interest rates drop more quickly as further ECB stimulus looks likely (and further ECB stimulus following likely end-of-July US FED stimulus) or whether Slovakian bonds are viewed as relatively better investments than those of their neighbors is hard to see. But either way, Slovakian interest rates are clearly responding differently than others in the region (or are responding to a different country-specific shock which seems a little less likely).
Source: Eurostat and own calculations. Daily EMU convergence criterion bond yields (i.e., central government 10-year bond yields). The center line is a rolling three-month average. The upper and lower boundaries are the average plus and average minus one standard deviation, respectively, for the same three-month period.
Throughout this time period, many of the returns showed a decline, suggesting an increase in demand for their bonds and increase in prices. Relative to their own historical trends, the majority of the countries kept their interest rates within their historical boundary. This suggests that we should continue to see movement in the yields for all CEE currencies over the coming weeks as they either return to their means or settle on new levels. However, based on InvestCEE’s The Global Interest Rate Challenge for Central European Economies, it’s expected that the interest rate will continue to lower, so the currencies will likely adjust to new levels. Romania ended the period in their lower historical boundary, so they may be in the process of adjusting to new levels.