(Updates yields, forint level from fifth paragraph.)
June 2 (Bloomberg) -- Hungary’s 10-year bond yields rose to the highest level in more than two months relative to Polish debt before today’s debt auction on speculation efforts to rein in public finances may fail.
Investors are demanding 119 basis points, or 1.19 percentage point, in extra yield to hold Hungarian 10-year debt rather than similar maturity Polish bonds, the most since March 15, data compiled by Bloomberg show. The spread was as small as 79 basis points on April 11. Hungary will offer 45 billion forint ($243 million) in notes maturing in 2014, 2017 and 2022 today, according to the Debt Management Agency.
Hungary’s local-currency bonds, the world’s best performing debt this year, have slumped in the past month on concern Europe’s credit crisis will spread and Prime Minister Viktor Orban may fall behind on plans to reduce the biggest debt burden among the European Union’s eastern members. Hungary designated July 1 as the deadline three months ago for detailing planned spending cuts, including changes to disability pensions, early retirement rules and a new drug subsidy system.
“There are risks around the implementation of the fiscal package,” Zoltan Arokszallasi, a Budapest-based fixed income analyst at Erste Group Bank AG, said in a telephone interview yesterday. “It may happen that the government won’t carry out everything that it planned.”
The yield on Hungary’s forint notes due in 2022 rose one basis point to 7.232 percent by 10:29 a.m. in Budapest, extending the increase since they were sold on May 19 to 18.6 basis points.
Forint, Bonds Slump
The forint strengthened less than 0.1 percent to 266.49 per euro, after falling 0.8 percent against the euro in May, the first monthly decline since November.
In the past month, Hungarian bonds have lost as much as 4 percent in dollar terms, the third worst decline worldwide after Greek and Irish bonds. Government bonds with at least 10 years maturity have returned 23 percent in dollar terms this year, the most worldwide, according to an index of forint-denominated debt compiled by Bloomberg.
The Hungarian currency “is vulnerable and will be under pressure in times of increasing risk aversion, especially if triggered by the peripheral euro zone debt problems,” Elisabeth Andreew, strategist at Nordea Bank AB in Copenhagen wrote in a research note on May 30.
Hungary’s government bought a 21.2 percent stake in Mol, the country’s largest refiner, from OAO Surgutneftegas for 1.88 billion euros ($2.7 billion) last week. The purchase cut the foreign-currency reserves that the country can rely on in case the government falls behind its debt cutting schedule and needs extra funds, Arokszallasi said.
For the government, it’s “even more important to show the market” that it can balance the budget in the longer term, he said.
Hungary raised its bond offer two weeks ago after an increase in demand for the debt kept borrowing costs near a seven-month low for shorter-dated notes. The government sold 67.5 billion forint of bonds compared with the planned 45 billion forint. The state sold 30 billion forint of 2014 notes at the last auction at an average yield of 6.48 percent, compared with 6.46 percent on May 5, which was the lowest for that maturity since Oct. 7.
The declining popularity of Orban’s government may also hurt its willingness to reduce spending, Erste’s Arokszallasi said. Orban’s Fidesz party lost support last month, Nepszabadsag reported on May 12, citing an Ipsos poll. Fidesz was favored by 24 percent of those polled, down from 26 percent the previous month and the lowest percentage since winning elections in April 2010, the newspaper said.
“If foreign confidence in Fidesz’s ability to push through fiscal adjustment falls sharply, the lack of foreign buyers could impact bond yields significantly,” Agata Dabrowska, and Kaan Nazli, New York-based analysts at Medley Global Advisors, wrote in a research note on May 24 after visiting Budapest.
--Editors: Linda Shen, Tim Farrand
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