What are the swap points telling us?

Judit Hevér – Gábor Orbán
junior analyst - macroeconomic analyst and bond portfolio manager

Money-market opportunities in the immediate region

Since we entered the latest, current stage of the global financial crisis, in spring 2009, the money markets of the “Visegrád” group of nations (Czech Republic, Hungary, Poland, Slovakia) have taken on a distinct, shared feature. The whole “Central and Eastern European banking system”, partly due to the fact that banks in the individual countries tend to have the same owners, is working to reduce the ratio of loans to deposits, with the result that funds for short-term placement are constantly being generated. Governments – despite a marked increase in their financing requirements – are neither able nor willing to tie up these funds by issuing a higher volume of discount T-bills. This is because, firstly, they are attempting to limit issuances as best they can under the present circumstances, since they would prefer to delay any rise in ratio of state debt to GDP until next year; and secondly they are intent on seizing every opportunity to raise the average maturity of state debt. And as if all this weren’t enough, the central banks are implementing (or simply threatening) extraordinary intervention in order to increase the supply of liquidity and push down the money-market (less-than-oneyear, interbank) interest rates. The most aggressive was the Polish central bank, which pushed the maturity of active repos to 12 months, and bought securities issued by commercial banksat public auction.

All of this inevitably led to exceptionally low interbank rates in these markets. The interbank fixing rates (BUBOR, PRIBOR, WIBOR), however, present us with a slightly different picture. Since the interest-cutting cycle can be regarded as over in the Czech Republic and Poland, the curve of the interbank fixing rates starts out from the central-bank base rate, displaying an upward tendency at expiry. A downward trend is only observable in Hungary, a fact which is attributable to expectations of a continuation of the interest-cutting cycle. But the interbank fixing rates are the result of an interbank tender, a form of questionnaire, and no actual trading takes place at these levels. Since the banks could have a vested interest in maintaining higher fixing values, these rates typically do not reflect the actual interest levels in the money market, which is why they also show no trace of the abundant liquidity.

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