Goldman Sachs Expect CEE Bonds To Underperform

From Goldman Sachs:

• CE3 rates markets have been at the epicentre of the sharp hawkish repricing across EM local rates this year.
• While this weakness can extend, the sell-off to date makes the choice of fresh payers harder at these levels.
• According to GS analysts, government bonds in the region are a vulnerable segment of these markets and offer attractive opportunities for shorts.
• CE3 bonds look expensive relative to the rest of the EM bond universe and relative to their own historical levels, both in real yield terms and relative to swaps.
• Excess liquidity in the domestic banking systems and central bank asset purchases (outside of CZK) have kept these markets relatively rich, and have crowded out foreign investors.
• Shorting CE3 bonds vs swaps tends to be negatively correlated with paying rates (with some meaningful exceptions, as in the last few weeks), which makes it attractive as a complement to paid EM rates trades, while still being an expression of further monetary policy normalization ahead.