UNTIL JUNE, IT had been a great 18 months for central and eastern European Eurobonds. The global backdrop of falling interest rates drove unprecedented amounts of money into emerging-market debt, as developed-market investors hunted abroad for yield. Many of these investors, including significant ones from Asia, were first-time buyers of CEE debt and thus most interested in straightforward Eurobonds, rather than more complicated local currency plays.
This, combined with a general optimistic assessment of the speed of CEE convergence towards EU accession and the single currency, helped to drive down CEE sovereign and blue-chip corporate bond yields. For example, for Hungary and Poland yields are now about 50 to 60 basis points over German Bunds. EU accession countries' Eurobond yields have all but converged with EU levels. Early buyers of these countries' bonds have enjoyed substantial capital gains.
Fundamentals ignored It may well turn out that this was a bubble, driven not by a discerning analysis of the convergence process or individual countries' economic fundamentals but by a desire for yield and an over-optimistic view of the speed of convergence at a time when some countries' economic fundamentals were deteriorating and political risk was increasing.