* Rate hike expectations, fiscal outlook sap Polish demand
* Investors bid double the offer in Czech sale
* Romania markets fear more short-term auctions
By Jason Hovet
PRAGUE, July 14 (Reuters) - Demand and prices fell at a
Polish bond auction on Wednesday a day after inflation data
lifted chances of an interest rate hike, while investors snapped
up the first Czech bond to go on sale in a month.
Central European governments have battled rising yields on
their debt in recent months due to high borrowing needs, the end
of monetary easing policies, and fears over their ability to
deliver on fiscal austerity promises.
The Czech Republic and Poland have found it easier to sell
debt than Hungary or Romania, both of which receive aid from the
International Monetary Fund and European Union, but must still
contend with what is expected to be record borrowing this year.
Economists expect Poland to be the first country in central
Europe to begin raising interest rates. Those hikes may begin as
early as this year, economists say, after data on Tuesday showed
June consumer inflation unexpectedly accelerated.
Coming on the heels of a 5-year dollar bond placement last
week, growing expectations of a looming interest rate rise
helped cut demand at the auction of 5-year domestic paper on
Wednesday. [] []
Warsaw sold 2.03 billion zlotys ($635 million) worth of
benchmark PS0415 paper at Wednesday's primary tender with the
average yield rising to 5.373 percent from 5.144 percent in May.
After the tender, yields in the secondary market crept up to
5.41 percent.
"Higher-than-expected CPI could have contributed to
expectations that monetary tightening is going to be frontloaded
rather than backloaded," Michal Dybula, chief economist at BNP
Paribas in Warsaw, said.
Despite avoiding recession and emerging from the downturn
last year with the fastest-growing European economy, Poland has
struggled to convince investors it can keep debt from breaching
levels that trigger, by law, harsh spending cuts.
The narrowness of the victory for Prime Minister Donald
Tusk's candidate in a presidential runoff this month also cast
doubt on government reforms before a 2011 election.
"This will not help the Polish bond markets, particularly in
relative comparison to regional peers," Dybula said.
CZECH ISSUANCE FEARED
In contrast to the Polish auction, investors bid for more
than twice the offer at the Czech Republic's first bond auction
in a month on Wednesday.
The Czech Finance Ministry sold 7.74 billion crowns ($387.2
million) worth of 5-year bonds. The average yield rose to 3.001
percent from 2.936 percent at a May 12 auction for the same
paper. <CNB08> []
Czech bond yields have dropped from 2010 highs hit last
month with hope an incoming centre-right government will go
through with promises of austerity.
But asset swap spreads, the risk premium paid over the
interbank market, have stayed elevated due to second half
issuance worries. The Finance Ministry only met around a third
of its overall 2010 borrowing in the first six months.
"Banks and local funds will have to swallow this higher
supply, so it is likely to see some additional widening in asset
swap spreads," JP Morgan economist Miroslav Plojhar said.
The ministry postponed a Eurobond in April and will likely
wait until after the summer lull. The launch of a foreign issue
would help relieve local pressure.
Some analysts have said Romania may have to look at another
international bond issue after having trouble meeting its needs
on local markets since May, when it first unveiled cost-cutting
measures to bring it in line with aid conditions.
The Finance Ministry has rejected most bids asking for a 7
percent or higher yield, and has had trouble selling below that.
"With high inflation, weaker growth and still a very sizable
current account deficit, interest rates given the risk
environment are way too low. They will have to give in at some
stage because they need to finance a pretty significant fiscal
deficit," Dybula said.
The ministry borrowed 1.1 billion lei on the money market on
Tuesday and could opt for a similar action if a fresh treasury
bill tender on Thursday is not successful. []
(Additional reporting by Sam Cage in Bucharest; Marcin Goettig
and Kuba Jaworowski in Warsaw, Editing by Lin Noueihed)
