Do Eastern European Government Bonds Still Offer Opportunities
Present outlook on bond yields
We’ve been keeping a close eye on Eastern European government bonds. We first highlighted the appeal of these investments when Bulgarian, but particularly Romanian, bonds were trading at rates much more favorable than their Euro Area counterparts with similar ratings. By February 2023, despite some appreciation, we still saw these as solid investments.
Four months on, it’s time to reevaluate these bonds alongside those of Greece, Hungary, and Germany. Our analysis focuses on 5-year EUR-yielding bonds, delivering insights into their performance over time.
Performance Trends: Bulgarian and Romanian Government Bonds
| Rating | AAA | BB | BBB | BBB- | BBB |
| Germany 5 Year | Greece 5 Year | Bulgaria 5 Year | Romania 5 Year | Hungary 5 Year | |
| Dec-21 | -0,45% | 0,71% | 0,38% | 1,63% | 0,18% |
| Jan-22 | -0,27% | 0,96% | 0,52% | 1,99% | 0,42% |
| Feb-22 | -0,13% | 1,62% | 0,97% | 3,20% | 1,47% |
| Mar-22 | 0,37% | 1,50% | 1,28% | 3,23% | 2,22% |
| Apr-22 | 0,68% | 2,35% | 2,17% | 4% | 3,06% |
| May-22 | 0,84% | 2,35% | 2,55% | 4,46% | 3,90% |
| Jun-22 | 1,10% | 3,06% | 3,57% | 5,87% | 3,94% |
| Jul-22 | 0,53% | 2,39% | 2,97% | 5,18% | 3,34% |
| Aug-22 | 1,38% | 3,46% | 2,92% | 5,78% | 3,14% |
| Sep-22 | 1,96% | 4,33% | 4,71% | 7,65% | 5,15% |
| Oct-22 | 2,01% | 4,31% | 4,88% | 7,13% | 5,24% |
| Nov-22 | 1,95% | 3,42% | 3,81% | 5,82% | 4,30% |
| Dec-22 | 2,57% | 3,88% | 4,12% | 5,76% | 4,84% |
| Jan-23 | 2,30% | 3,44% | 3,96% | 5,46% | 4,55% |
| Feb-23 | 2,70% | 3,30% | 3,82% | 5,09% | 4,84% |
| Mar-23 | 2,33% | 3,70% | 3,72% | 5,15% | 4,72% |
| Apr-23 | 2.31% | 3,77% | 3,35% | 5,07% | 4,61% |
| May-23 | 2,36% | 3,44% | 3,47% | 5,20% | 4,63% |
| Jun-23 | 2,64% | 3,43% | 3,46% | 5,15% | 4,50% |
| Change since Oct 2022 | 0,63% | -0,88% | -1,42% | -1,98% | -0,64% |
We’ve intentionally divided the chart to highlight their performance since our initial coverage. Interestingly, while the yield on German 5-year government bonds increased by roughly 0.63%, the yield on our suggested 5-year EUR Bulgarian and Romanian government bonds decreased!
Our preference for Romanian bonds as the top value, closely followed by Bulgarian bonds, turned out to be spot on.
Now, let’s shift our attention to the spreads of these Eastern European bonds compared to Germany.
Spreads over Germany: аn оverview
As evidenced in the data, the majority of Eastern European bonds are currently trading at levels quite similar to those of Dec 2021. We continue to favor holding Romanian and Bulgarian government bonds, although they no longer offer the exceptional deal they did back in November 2022.
Bulgarian government bonds are now more or less aligned with their long-term valuation relative to German bonds. However, this doesn’t imply we would steer clear of Bulgarian bonds – we simply don’t foresee them providing above-average returns.
On the other hand, Romanian government bonds continue to deliver yields above the historical average when compared to German bonds. Despite the less favorable prices, we maintain that establishing positions remains a sound investment strategy.
| Spread Over Germany | BB | BBB | BBB- | BBB |
| Greece 5 Year | Bulgaria 5 Year | Romania 5 Year | Hungary 5 Year | |
| Dec-21 | 1,16% | 0,83% | 2,08% | 0,63% |
| Jan-22 | 1,23% | 0,79% | 2,26% | 0,69% |
| Feb-22 | 1,75% | 1,10% | 3,33% | 1,60% |
| Mar-22 | 1,13% | 0,91% | 2,86% | 1,85% |
| Apr-22 | 1,68% | 1,50% | 3,33% | 2,39% |
| May-22 | 1,51% | 1,71% | 3,62% | 3,06% |
| Jun-22 | 1,96% | 2,47% | 4,77% | 2,84% |
| Jul-22 | 1,87% | 2,45% | 4,66% | 2,82% |
| Aug-22 | 2,08% | 1,54% | 4,40% | 1,76% |
| Sep-22 | 2,37% | 2,75% | 5,69% | 3,19% |
| Oct-22 | 2,30% | 2,87% | 5,12% | 3,23% |
| Nov-22 | 1,47% | 1,86% | 3,87% | 2,35% |
| Dec-22 | 1,32% | 1,56% | 3,20% | 2,29% |
| Jan-23 | 1,14% | 1,66% | 3,16% | 2,25% |
| Feb-23 | 0,60% | 1,12% | 2,39% | 2,14% |
| Mar-23 | 1,37% | 1,39% | 2,82% | 2,39% |
| Apr-23 | 1,46% | 1,04% | 2,76% | 2,30% |
| May-23 | 1,08% | 1,11% | 2,84% | 2,27% |
| Jun-23 | 0,79% | 0,82% | 2,51% | 1,86% |
Hungarian government bonds: a different dynamic
Hungarian bonds, however, have a different dynamic. Initially, in our November 2022 article, we did not even consider Hungarian government bonds as the case for Bulgarian government bonds was much more potent!
Both countries’ yields are trading similarly and have the same credit ratings. Bulgaria, however, had a much lower Debt/GDP ratio than Hungary – 21% vs 74%.
Bulgaria’s Current Account to GDP was also much better than that of Hungary: -0,7% vs -8% in 2022. With numbers like that, it would be unwise even to consider Hungary over Bulgaria.
The critical thing to keep in perspective here is that Bulgaria has been and continues to be one of the most fiscally conservative countries in the EU. The indicators we mentioned about Hungary are similar for many countries in the region – Romania, Greece, Croatia, and even Slovenia.
The average Debt/GDP ratio in the Euro Area is 91%, and the average Current Account to GDP for 2022 was -1%. However, countries geographically close to Ukraine had an average of a lot worse Current Account to GDP deficit for 2022.
To name a few – for Romania, it was -9,3%, Latvia -6,4%, Lithuania -5,1%, and Poland -3,1%. So, in that regard, the reading for Hungary in 2022 was not unusual or exceptionally bad.
Why Hungarian bonds are trading cheaply
The governance of President Viktor Orban is a key factor. He has gotten into many political controversies regarding Hungary’s domestic policies. Additionally, Hungary is not considered a good team player inside the EU, even though it is a member of the Union. For example, Hungary is also one of the few EU countries still buying Russian oil and gas.
The price of Hungarian government bonds already reflects most of the future potentially harmful scenarios for the country. Mr. Orban has been in power for a long time, Hungary is completely economically integrated in the EU, and the European Union rarely does anything drastic, especially towards its members.
Moreover, even if there should be some negative economic implications for Hungary, like a loss of subsidies, a member of the EU can NOT afford to default on its debt and expect that its economy will not be severely impacted.
Key takeaway
To summarize, Eastern European government bonds, mainly Romanian and Hungarian 5-year EUR-denominated bonds, show promise despite fluctuations. They remain a noteworthy part of the investment landscape.
However, as with any investment, investors must consider their risk tolerance and objectives.