Erste Asset Management

Do Eastern European bonds offer opportunities?

Do Eastern European bonds offer opportunities?
Do Eastern European bonds offer opportunities?
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The war in Ukraine is taxing for the nerves of bond investors. A particular focus is currently on government bonds from Central and Eastern Europe. After all, Russia has been punished with grave sanctions that brought trading to a standstill. But there is a silver lining, as Anton Hauser, fund manager of ERSTE BOND DANUBIA – a fund that focuses on East European government bonds – explains in an interview with OUR VIEW.

Bonds from states in and around the crisis region have seen better days. What effects have the sanctions had?

Of course, these bonds incurred losses, and Russian bonds suffered the most. Hard currency bonds had a default priced in, and the rouble depreciated dramatically. Trading in local currency bonds was suspended. When trading is resumed this week, we should get a clearer picture about the price development in these segments. Currencies and bonds in the other CEE countries have recovered some of the original, in some cases drastic losses.

Russia has defied expectations by honouring its coupon payment on 16 March, not without a lot of issues though. What can we expect for the upcoming payments?

Yes, it has been a bit messy over the past few days. At first, Russia said it wanted to honour its debt, but only in rouble if it deemed a country hostile. Then it decided to pay in US dollar after all. But it was not clear whether the payments would be successful. In the end, the investors received their payments with a slight delay. Not too bad, then.

Does Russia still play a role in the portfolio of ERSTE BOND DANUBIA?

We envisage a default, which is why the bonds in the portfolio are valued in single digit percentages. As of the end of February, Russian bonds accounted for only 9% of fund assets. We also have to accept that due to the EU capital market sanctions, trading is currently in some cases not possible.

The interesting question is whether Russia will continue to service its debt in US dollar. Numerous coupon payments are scheduled until the end of March, and on 2 April, a USD 2bn bond falls due. In some of these cases, the Russian state has the legally stipulated right to pay in rouble, which should at the very least push back a possible default.

What alternatives do you have in your allocation? After all, Eastern Europe is the “growth region at our doorstep”?

After the reduction of Russian bonds, the focus of the fund is now increasingly on Eastern and South-Eastern Europe. Bonds and currencies from those regions came under pressure as well. Given the economic perspectives of these countries and the weak economic ties with Russia, the losses are only partially justified. The catch-up potential of Eastern and South-Eastern Europe is still enormous. The people are industrious and want to create something for themselves. You only have to look at the development of countries like Slovenia, Hungary, the Czech Republic, or Slovakia in the past three decades. They have caught up enormously in terms of economic output and standard of living.

„After the reduction of Russian bonds, the focus of the fund is now increasingly on Eastern and South-Eastern Europe.“

Anton Hauser, Senior Fund Manager, Erste AM

© Image: Huger

What are the arguments in favour of East European government bonds?

The average creditworthiness of the countries is solid, the government debt is low in comparison with the Eurozone or USA. At about 5Y, the maturities of bonds in local currency are on average shorter than for Euroland government bonds. This is a good card to hold in times of rising interest rates. In the Czech republic, for example, the average yield is 3.5%; in Poland, 4.5%; in Romania, about 6% (Bloomberg, as of 18 March 2022). These yield levels should be able to compensate for the prevalent level of inflation.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

Legal note:

Prognoses are no reliable indicator for future performance.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

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Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

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