By Sandor Peto
BUDAPEST (Reuters) - Central European long-term government bond yields will increase over the coming year due to a likely pick-up in inflation and yield rises in the United States and the euro zone, a Reuters poll of 19 analysts showed.
An economic slowdown in the euro zone and the rest of the world, as well as slower rises in interest rates in developed markets, are significant risks which could hinder yield rises, however, analysts in the Dec 11-12 poll said.
"The Federal Reserve and the European Central Bank interest rate paths are a (downward) risk to the (yield) forecasts," said Peter Virovacz, ING analyst in Budapest.
Hungary's 10-year yield could rising by 63 basis points from Wednesday's levels
The corresponding Czech yield could increase by 51 basis points to 2.48 percent.
Polish yields could gain 44 basis points to 3.4 percent, in line with a rise in the 10-year U.S. Treasury yield projected in a separate Reuters poll. [US/INT]
An inversion of the U.S. yield curve next year, usually a signal of upcoming recession, is also a risk which could mean lower than expected yields, analysts said.
In a survey three months ago, analysts predicted a faster rise in regional yields.
But yields have sharply retreated from their mid-autumn peaks as a fall in crude prices and increased worries of a global economic slowdown made analysts scale back forecasts for central bank interest rate hikes.
Hungarian yields have declined by 75 basis points, Polish yields shed 45 basis points, and the Czech yield 30 basis points.
This means only the Czech long-term yield is expected to rise above its autumn peak over the next year.
Poland's central bank, which has the lowest inflation target in the region, is expected to keep its interest rates on hold next year.
"The gloomier (global) outlook and rising doubts about the first ECB (rate) hike have begun to weigh on yield developments, both globally and in the region," said Erste Group analyst Katarzyna Rzentarzewska, who predicts a slow Polish yield rise.
Hungarian interest rates are also seen staying at record lows in 2019, although the central bank is expected to let forint liquidity in markets tighten as core inflation is expected to rise.
The Czech central bank, which defends a lower inflation target at 2 percent is seen increasing its interest rates further, particularly if the crown (EURCZK=) currency stays weaker than its forecasts.
"The Finance Ministry works with a very optimistic revenue outlook, which will push the government budget deficit upwards above plan, for the first time since 2011," said Jakub Mateju, economist at Komercni Banka.
"This will cool the optimism about the Czech public finance outlook and lead to a Czech government bond yield rise."
Hungary's central bank could try to keep short-term yields low even if inflation rises faster than expected, and this can add to a rise in long-term yields, OTP Bank analyst Marton Modos said.
However, it helps that the government budget is healthy, while a continuing strong inflow of European Union funds can curb government bond issues, analysts said.
In Poland, a pick-up in inflation, a shift toward a more hawkish monetary policy and a likely ECB interest rate hike next year could fuel a rise in bond yields, said BOS Bank economist Aleksandra Swiatowska.
Polish parliamentary elections in November pose a risk, however, as in the run-up the government may subsidize energy prices, keeping inflation down, although a pre-vote spending spree could lead to higher government debt supply, analysts said.