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. Last Updated: 07/27/2016

Questions on East Europe Bonds

VIENNA -- Foreign investors who have piled into Polish, Czech and Hungarian shares are steering clear of Eastern Europe's domestic bond markets, analysts say. Given the roller-coaster nature of regional stock markets and the relatively few bond issues open to foreigners, a conventional comparison of the sectors by yield is not helpful. Despite the dismal performance of the region's equity markets in recent months, East European shares still hold out the possibility of huge returns. East European bonds, while yielding much more than issues in more "mature" markets, do carry an unpredictable currency risk and the issues themselves are often illiquid. "There's no question that the equity markets, which were overheated and are now correcting, will be of greater interest to foreigners for the time being," said Thomas Reininger, East European analyst at Raiffeisen Zentralbank …sterreich AG. Hungary opened its domestic bond market to foreigners last week with a three-year 15 billion forint ($146 million) issue paying 25 percent. Previous Hungarian issues were restricted to domestic investors, although foreigners could buy shares in Hungarian bond funds. But few foreigners bought the new Hungarian bond. Czech and longer-dated Polish government bonds are already open to foreign investors. However, few of the dozens of funds set up in the last year or so to invest in Eastern Europe look seriously at bonds. Liquidity is a major problem. The Prague stock exchange lists just three government bonds, with a total volume of 9.9 billion crowns ($340 million), two bonds issued by Komercni banka and two by utility CEZ. The Czech government's budget surplus means a flood of government issues is unlikely. Thomas Hogh, fixed income analyst at Capital Research International, said his firm particularly interested in the possibility of Czech bonds. Poland, which has only just reached agreement with its bank creditors, and Hungary, with the largest foreign debt per capita in Eastern Europe, raise questions of credit quality. One of the clinching arguments for Hogh is the difference in returns: "If you have a portfolio of stocks which goes up 30 to 50 percent, given bonds can go up 10 to 15 percent, the risk return is a lot more favorable for the equities," he said. Crucially, shares tend to be more devaluation-proof as they can rise on prospects of higher company earnings from better export performances after a devaluation, Hogh said. A study by GiroCredit Bank AG der Sparkassen estimated that the new Hungarian bond would have to fall in value by 17 percent a year against the Deutsche mark or 14.5 percent a year against the dollar for holders to be worse off than investors in comparable National Bank of Hungary mark and dollar bonds, respectively. With the Czech Republic moving into an export-led recovery and enjoying a stable currency and relatively low inflation, some people see a revaluation of the crown in prospect. "There are opportunities. We particularly like the Czech Republic," said Paul Murray-John, fixed-income fund manager at GT Management. "What is appealing is the potential currency gain." But Czech bonds, like Czech shares, are often not readily available, with investors tending to snap them up on issue and hold them to maturity.