LONDON- JPMorgan has reiterated its underweight position in Central and Eastern European local bonds and currencies, warning of 'taper tantrum' risk as central banks tighten monetary policy.
Central bank bond purchase programmes in Hungary and Poland to support their economies through the coronavirus crisis have been amongst the largest in emerging markets over the past year.
But with inflation stronger than expected and as economies begin to recover closer to pre-pandemic levels, central banks in the region will inevitably scale back the size of these schemes through the second half of 2021, a JPMorgan report said.
Hungary and the Czech Republic reported higher-than-expected CPI numbers for April on Tuesday, while Romania is due to announce new inflation forecasts on Friday that are likely to show a sharp rise.
Polish inflation jumped to 4.3% in April, above the upper end of the central bank's target range.
The report by JPMorgan strategist Saad Siddiqui noted that bond asset swap spreads in Poland and Hungary are at around historical extremes, suggesting a high-degree of over-valuation.
"As policy is normalized, there could be a sharp reversal of asset swap spreads and bond yields, risking an overshoot akin to a 'taper tantrum' at some point in the coming months," it said.
While a bond market tantrum was a high risk, it was not inevitable, the report added.
The backdrop reinforced JPMorgan's pre-existing underweight positions in both Polish and Czech local bonds, while the prospect of currency underperformance backed being underweight in the Hungarian forint and the Polish zloty, the report said.
(Reporting by Tom Arnold; Editing by Alexander Smith) ((Tom.Arnold@thomsonreuters.com; +442075428510; Reuters Messaging: tom.arnold.thomsonreuters.com@reuters.net))
