Friday, November 5, 2010

Romania Sells 3-Year Bonds First Time Since April at 7.1% Average Yield

Romania sold three-year bonds for the first time in seven months on the domestic market after it dropped a self-imposed yield cap amid higher inflation expectations and rising political tensions.

The Finance Ministry sold 120 million lei ($40 million) of three-year Treasury bonds at an auction in Bucharest today from the planned 300 million lei. Average yield was 7.1 percent, more than the 7 percent yield it paid since July for both Treasury bills and bonds, the central bank said on its website.

Romania, which relies on a 20 billion-euro ($28.5 billion) bailout led by the International Monetary Fund, struggled over the past four months to find buyers for leu-denominated debt to cover its budget deficit after an increase in a value-added tax boosted consumer prices. Thecentral bank raised its inflation prediction for this year and next today because of the effects of the government’s VAT increase.

“It seems like the ministry dropped the yield cap because there’s a lot of short-term debt accumulating,” ING Bank Romania SA economist Vlad Muscalu said by phone. “I think there is pressure for higher yields on one-, three- and five-year maturities, while a 7 percent yield for the six-month bills is enough at this point.”

The inflation rate will end the year at 8.2 percent and at 3.4 percent in 2011, Governor Mugur Isarescu told reporters in Bucharest. In August, the central bank forecast annual inflation of 7.8 percent in December and 3.1 percent at the end of 2011.

The government, which survived two no-confidence votes in parliament this year over unpopular wage cuts and the VAT increase, is struggling to get next year’s budget and pension laws approved to meet the terms of its international bailout, as the opposition and unions try to persuade the ruling coalition lawmakers to bring down Prime Minister Emil Boc’s cabinet.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net.

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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