Head of European Fixed Income at Franklin Templeton: We are probably near the peak in yields in many CEE countries

How high do you expect inflation to be in the Eurozone and the Central Eastern European (CEE) region this year and next year?

We anticipate inflation peaking in the Eurozone and CEE later this year. However, external events such as Russia further reducing natural gas may push the peak into the beginning of 2023.

Do you expect significant increase in the country risk premiums of the Central Eastern European countries as a result of the war and the energy crisis?

The CEE countries have seen an increase in country risk premiums already and many provide attractive entry points relative to fundamentals.

In your opinion, are we close to the peak of bond yields in the CEE countries? How attractive are the region and Hungary for bond investors?

We are probably near the peak in yields in many CEE countries as they started tightening cycle much earlier and more aggressively than the European Central Bank.  There are attractive opportunities in CEE bonds and currency.  Two that we currently favor are Polish Zloty and Czech Koruna. 

How dynamic do you expect to be the interest rate hike cycle from the ECB? Can bond purchases be expanded with regard to the more vulnerable southern, peripheral countries? In your view, what are currently the most important risks in the eurozone and the CEE region?

The interest cycle from the ECB will be very dynamic focusing on meeting by meeting data driving the interest rate decisions.

We would anticipate them continuing to hike rates through the end of the year to combat inflation but with a possible pause next year if the economies of the Eurozone start to slow.

The Transmission Protection Instrument (TPI) released by the ECB in July will allow peripheral countries to be supported in the Eurozone but the exact levels when this support would be provided is yet to be determined so would probably have to be a fairly extreme event to get the ECB involved.

The most important risk to the Eurozone is a recession in the new year before inflation starts to subside as it would leave the ECB in a very difficult situation of having to continue to hike rates to combat inflation (official target) in the face of negative growth.   

Do you expect further significant dollar appreciation?

The US dollar may appreciate a bit further but most of the move has probably happened.

However, divergence in monetary policy still favors the US dollar against the Euro.