(Updates prices from third paragraph.)
Oct. 6 (Bloomberg) -- Hungarian bond yields climbed to the highest since January at an auction on speculation the central bank may raise borrowing costs to defend the currency.
The state raised 20 billion forint ($90 million) in notes maturing in 2014 at an average yield of 7.23 percent, the highest since Jan. 13, and compared with 6.65 percent at the last sale on Sept. 22, according to auction results from the Debt Management Agency published on Bloomberg. The agency sold 11 billion forint of 2017 bonds at 7.52 percent, against 7.25 percent two weeks ago.
Traders in interest-rate derivatives raised bets on tighter monetary conditions as the forint’s decline threatened to drive up inflation and payments on foreign-currency loans. The forint slid to as weak as 300.7 per euro yesterday, its weakest in 2 1/2 years, before recovering to 297.5 per euro as of 4:20 p.m. today.
“An interest-rate increase has been priced in recently,” Sandor Jobbagy, a Budapest-based economist at the CIB Bank Zrt. unit of Intesa Sanpaolo SpA, said in a telephone interview after the auction.
Forward-rate agreements fixing three-month interest in one month surged to 6.49 percent two days ago, a two-year high, from 6.07 percent a month earlier. They fell to 6.38 percent today, trading 27 basis points, or 0.27 percentage point, above the three-month Budapest interbank offered rate.
The National Bank of Hungary on Sept. 20 left its benchmark two-week deposit rate unchanged for an eighth month. 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.
“There are risks that further strong depreciation of the currency and an increase of risk spreads could trigger a rate hike,” Zoltan Arokszallasi, a Budapest-based fixed-income analyst at Erste Group Bank AG, wrote in a research report today. “This is not currently our baseline scenario.”
Investors bid for 83 billion forint in debt at the auction, compared with 122.5 billion forint two weeks ago. The agency also sold 12 billion forint of 2022 notes at 7.94 percent, down from 8.14 percent. The agency sold no additional debt at a later, non-competitive tender.
Three-year bonds fell for the first day in three in the secondary market, with yields rising five basis points to 7.300 percent. Yields on the 2017 debt fell for a third day, losing 12 basis points to 7.650 percent. On the 2022 notes, yields retreated 12 basis points to 8.038 percent.
Budget Target Concern
Concern that Hungary won’t meet its budget targets also drove up borrowing costs, Jobbagy said.
“Trends in the real economy would justify a rate cut, while financial stability factors point to tightening,” according to Jobbagy.
Hungary’s 2012 budget, which the government sent to parliament last week, assumes growth in gross domestic product of 1.5 percent, underlying a plan to cut the deficit to 2.5 percent of GDP from 4.2 percent last year. The Cabinet’s growth projection may be too optimistic, according to economists including Matyas Kovacs at Raiffeisen Bank International AG.
--With assistance from Zoltan Simon in Budapest. Editors: Linda Shen, Gavin Serkin
To contact the reporter on this story: Andras Gergely in Budapest at firstname.lastname@example.org
To contact the editor responsible for this story: Gavin Serkin at email@example.com