OREANDA-NEWS. March 13, 2015. Central European government bonds firmed on Thursday after Serbia joined a regional trend of monetary easing although growing expectations that US interest rates will soon rise kept investors on edge.

Local currency markets also continued to wobble on fears of a Federal Reserve rate hike that would make regional assets relatively less attractive. However, Europe's emerging east is benefiting from European Central Bank asset buying that is driving yields in the nearby euro zone to fresh record lows.

The region's most liquid currency, the zloty initially firmed against the euro, but by 1313 GMT it had eased to 4.138, weaker by a third of a percent from Wednesday.

The forint and the Czech crown gave up all of their early gains, but the leu stayed firmer by 0.2 percent, at 4.438 versus the euro.

Serbia's dinar was bid at 120.19 against the euro, firmer from early levels at 120.60, even after the central bank cut its main interest rate -- the region's highest -- to 7.5 percent from 8 percent.

It was the first rate cut in Serbia since November and comes after Poland's Monetary Policy Council announced the end of its easing cycle last week, when it lowered its main interest rate by half a percentage point to 1.5 percent.

Serbia's central bank has been unable to cut rates to help lift the economy out of recession as concerns about the lack of much-needed fiscal reforms have weighed on the dinar.

But a loan deal with the International Monetary Fund last month helped stabilize the currency and the Fund said the Serbian central bank had room to cut rates and boost lending.

Hungary's and Romania's central banks are also widely expected to cut rates at their meetings late this month as inflation is around zero in the region, well below central bank target levels. Polish forward rate agreements are pricing in unchanged interest rates.

The zloty is under pressure due to concerns that the Fed may hike rates in June, which could Polish assets, overshadowing the positive impact of ECB asset purchases on European emerging markets, said Bank Pekao analyst Arkadiusz Urbanski.

The Fed will hold a meeting on March 17 and 18.

Figures showing a drop in US retail sales in February tempered rate hike expectations somewhat, however, triggering some buying of volatile Hungarian debt, one Budapest-based fixed income trader said.

The country's five-year benchmark bonds traded at a yield of 2.85 percent, up from early lows of 2.8 percent but still down by 21 basis points from Wednesday's fixing.

"The short end of the curve is about steady and any selling is focused on medium- and long-term maturities," the trader said, adding that bouts of buying also targeted the same bonds, which have relatively high yields.

"The power of the buying side (seen in the past months) has weakened and this is a two-side market now," he added.