Investors Shift Toward Eastern European Sovereign Debt: Bulgaria, Hungary, and Lithuania Favored, But Local Currency Volatility and Liquidity Risks Remain

(1) As investors search for the best opportunities in the European sovereign bond market, their attention is increasingly turning eastward. (2) Bulgaria, Hungary, and Lithuania have become top choices, thanks to improved economic and fiscal conditions and the yields they offer—a combination that is harder to find among their Western neighbors. (3) Political regime changes and the adoption of the euro by more countries—accompanied by the strict economic requirements set by Brussels—have further strengthened the investment case. (4) Of course, investing in Eastern Europe comes with its own challenges, from local currency fluctuations to relatively shallow bond market liquidity; landlocked countries like Hungary are also particularly vulnerable to energy shocks that more broadly impact European debt. (5) In many parts of the region, debt levels and deficits remain high.