CEE MARKETS 3-Rally on Polish bonds continues, CZK recoups losses


* Polish 5-yr bond yields at record low

* Czech c.bank governor says bank would intervene if needed

* Romania sells planned 250 mln lei in 3-yr bonds

(Updates throughout)

By Jason Hovet and Dagmara Leszkowicz

PRAGUE/WARSAW, Oct 11 (Reuters) - Polish 5-year bonds hitrecord lows on Thursday on expectations the country's centralbank will soon cut borrowing costs, while the Czech crownrecouped early losses tracking a stronger euro.

Earlier, the crown fell after central bank governor MiroslavSinger said the bank may intervene to weaken the currency ifthere was a risk of long-term deflation pressure.

Currencies across the region were mostly firmer in afternoontrade though traders said worries over Spain persist.

Expectations of lower interest rates in Hungary and Polandare pointing to weaker currencies in those regions and bondyields are near record lows in Poland and the Czech Republic.

"Rally on Polish bonds continues and every single effort ofsetting against the trend ends up badly," said Bartlomiej Wit,chief fixed income dealer at ING Bank Slaski.

By 1316 GMT the crown, the Polish zlotyand Hungary's forinteach added some 0.2 percent tothe euro while Romania's leuedged some 0.2 percentlower.

Minutes from the Czech central bank's Sept. 27 meeting,released last week, showed that the governing board was stilldivided over whether to intervene against the crown and employmore monetary easing to prop up the recession-hit economy.

Years of austerity are taking a toll on the Czech economyand other economies in the region are fighting to get out of oravoid recession. The export-driven region is also strugglingwith slowing trade with the euro zone.

In Poland, a speech by Prime Minister Donald Tusk on Fridaywas keenly awaited, as he is expected to announce some measuresto try to stimulate growth.

In Hungary, the forint was steady, shrugging off datashowing the headline inflation rate jumped to 6.6 percent, thehighest in over four years. Hungary has cut its interest rates,the highest in the European Union, for two months in a row.

Hungary sold nearly 1.5 times as much 12-month paper asoriginally planned and average yields fell 23 basis points fromthe previous auction two weeks ago. Yields on the secondarymarket also fell, and the government plans to launch a newthree-year euro-denominated bond.

Budapest, which is still wrangling with the InternationalMonetary Fund over a financing deal analysts say is needed tobring its borrowing costs back down to manageable levels, hasnot tapped international markets so far this year.

"Regardless of the high inflation data, which surpassedalready high market projections, expectations for interest ratecuts have not diminished," said a Budapest fixed income trader.

"If Hungary wants, it can come out with a euro bond, and ifstorm clouds are gathering, there is still the IMF as analternative."

Romania sold a planned 250 million lei in three-yeartreasury bonds, with the average accepted yield some 26 basispoints lower compared to the level accepted at the last tenderof the paper in February.

--------------------------MARKET SNAPSHOT--------------------Currency Latest Previous Local Localclose currency currencychange changetoday in 2012Czech crown24.855 24.908 +0.21% +2.78%Polish zloty4.088 4.095 +0.17% +9.21%Hungarian forint281.75 282.35 +0.21% +11.66%Croatian kuna7.52 7.469 -0.68% -0.06%Romanian leu4.567 4.56 -0.15% -5.39%Serbian dinar113.5 113.6 +0.09% -5.77%Yield SpreadsCzech treasury bonds2-yr T-bond CZ2YT=RR 0 basis points to 45bps over bmk*7-yr T-bond CZ6YT=RR +4 basis points to +76bps over bmk*10-yr T-bond CZ10YT=RR +5 basis points to +86bps over bmk*Polish treasury bonds2-yr T-bond PL2YT=RR +1 basis points to +394bps over bmk*5-yr T-bond PL5YT=RR -2 basis points to +359bps over bmk*10-yr T-bond PL10YT=RR -5 basis points to +305bps over bmk*

Hungarian treasury bonds

3-yr T-bond HU3YT=RR -7 basis points to +631bps over bmk*5-yr T-bond HU5YT=RR -4 basis points to +602bps over bmk*10-yr T-bond HU10YT=RR -4 basis points to +555bps over bmk**Benchmark is German bond equivalent.All data taken from Reuters at 1516 CET.Currency percent change calculated from the daily domesticclose at 1600 GMT.For related news and prices, click on the codes in brackets: Allemerging market newsSpot FX ratesEastern Europe spot FXMiddle East spot FXAsiaspot FXLatin America spot FXOthernews and reports World central bank newsEconomic DataGuideOfficial ratesEmerging DiaryTop eventsDiariesDiaries Index

(Reporting by Reuters bureaus; Editing by Elaine Hardcastle)

((dagmara.leszkowicz@thomsonreuters.com)(+48 22 653 9718)(Reuters Messaging:dagmara.leszkowicz.reuters.com@reuters.net))