It has just been announced that Romania is eligible for entry to the JPM GBI-EM Index between March 1st and May 1st 2013.

The weight in the Index is estimated to be at 0.54%.

In March, Romania is also set to enter into the Barclays EM Local Government Bond Index.

Assuming a rough estimate of US$400bn of assets tracking these Indices, Romania's weight implies additional non-resident holdings of $2bn or EUR1.5bn. What does this mean?

As 45% of Romania's stock of debt is denominated in RON around EUR22bn, these inclusions create additional demand equivalent to 7% of outstanding RON stock. With non-resident interest likely to be focussed at longer than 1y maturities, that make around half of outstanding RON debt, the impact on longer duration bond prices could be significant.

We expect yields to move significantly lower from current levels over the coming weeks as buying takes place ahead of the Index entries. We target levels of 5.25% for the curve exceeding 1y. We have been long the ROMGB Bonds (Oct 14s and Apr 16s) with FX unhedged, since early December in fact the trade was in our Top Themes and Trades of 14 December 2012. We continue to believe that bonds offer value. We also think that FX will continue to appreciate to possibly 4.25 (vs the EUR), however, the likelihood of central bank intervention also increases as the currency appreciates.

We would also expect fresh supply of RON bonds from the government, keen to rebalance the structure of the debt towards more local currency and less foreign currency. That would be credit positive, with less issuance to be expected in foreign currency, and more financing options for the government in the future.

Source: bne