Bloomberg News

Hungary Rate Bets Push Yields to 9-Month High Before Auction

October 05, 2011

(Updates with analyst’s comment in fourth paragraph.)

Oct. 5 (Bloomberg) -- Bond yields in Hungary, the European Union’s most indebted eastern member, headed for the highest in nine months before tomorrow’s bond sale on speculation that the central bank will lift interest rates to support the forint.

The country is offering 43 billion forint ($192 million) of debt due in 2014, 2017 and 2022, according to data from AKK, the government’s debt agency, published on Bloomberg. The secondary- market yield on the 2017 notes fell three basis points to 7.84 percent by 2:57 p.m. in Budapest, after rising to as much as 8.02 percent yesterday, the highest since January.

Traders in interest-rate derivatives raised bets on tighter monetary conditions as the forint’s weakening threatens to drive inflation and payments on foreign-currency loans. The forint slid to as much as 300.7 per euro, its weakest in 2 1/2 years, before recovering to 298.

“The National Bank of Hungary stands ready to respond to currency weakness,” Societe Generale SA strategist Guillaume Salomon in London wrote today in a report after talking to Hungarian officials. The forint’s weakness might prompt “aggressive” rate increases of as much as 300 basis points, with some tightening already expected this month, Salomon added.

Forward-rate agreements, used to hedge against or bet on future funding-cost changes, signal belief that Hungary’s main rate will rise to 6.25 percent on Oct. 25 and 6.75 percent by January from 6 percent now. The FRA fixing three-month interest in one month surged yesterday to 6.49 percent, a two-year high, from 6.07 percent a month earlier. It fell to 6.41 percent today, trading 30 basis points, or 0.3 percentage point, above the three-month Budapest interbank offered rate.

Default Swaps

The cost of insuring Hungary’s government bonds jumped to the highest since March 2009 after Premier Viktor Orban said two days ago the government wants to restructure 180 billion forint of debt amassed by local administrations. Credit-default swaps, which increase as creditworthiness perceptions worsen, rose to 572 basis points today from 532 at the end of last week and 268 three months ago, according to CMA data.

The debt of the counties is likely to be taken over by the central government, which will “increase the fiscal burden and the credit risk of the government,” BNP Paribas SA strategists led by Bartosz Pawlowski in London wrote in a report yesterday. “That is why the CDS of Hungary underperformed.”

‘Credit Negative’

Hungary, which received an international bailout in 2008, has the lowest investment-grade rating from Standard & Poor’s, Moody’s Investors Services and Fitch Ratings. Moody’s said last week that Hungary’s passage in September of a law allowing repayment of foreign-currency mortgages at fixed exchange rates, with banks absorbing losses, sets a “worrying precedent” and is “credit-negative.”

The National Bank of Hungary on Sept. 20 left its benchmark two-week deposit rate unchanged for an eighth month after the mortgage-fixing plan hurt the forint. The majority of policy makers considered that the deteriorating global risk environment is preventing policy makers from cutting the interest rate even as the inflation outlook may justify such a move, according to minutes of the meeting published today.

Policy makers will probably keep the key rate at 6 percent on Oct. 25, according to all seven economists surveyed by Bloomberg.

The forint weakening past 300 versus the euro probably won’t be enough to lead to monetary tightening, according to strategists at Nomura Plc and Royal Bank of Scotland Group Plc.

Policy makers may “tolerate” the forint depreciating to as weak as 325 against the common currency and the market is pricing in too much in rate increases, RBS economist Timothy Ash wrote in a research report late yesterday after meeting officials at the central bank and government this week.

“We firmly disagree with these statements,” Societe Generale’s Salomon said by e-mail. “The NBH would ideally like to wait till the Oct. 25 meeting and deliver some moderate tightening, 50 basis points in our view. But higher euro-forint levels could decide otherwise.”

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Krystof Chamonikolas in Prague at; Andras Gergely in Budapest at

To contact the editor responsible for this story: Gavin Serkin at

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