Hungarian Yield Hits Two-Year High on Junk Risk; Forint Weakens

Hungarian bonds fell, lifting a benchmark yield to the highest in more than two years, and the forint slid after Standard & Poor’s and Fitch Ratings indicated they may cut the country’s assessment to non-investment grade as early as this month.

The forint was the world’s worst-performing currency today, trading down 1.3 percent to 314.90 per euro as of 11:16 a.m. in Budapest. The yield on government notes due in 2017 surged 32 basis points, or 0.32 percentage point, to 8.474 percent.

S&P is likely to make a decision this month on Hungary’s BBB- credit grade, the company said on Nov. 12 after placing the rating on “CreditWatch with negative implications.” Fitch cut the outlook on Hungary’s lowest investment grade to negative from stable, joining S&P and Moody’s Investors Service.

The rating outlook revision “risks adding fuel to fire given the performance of the forint of late,” BNP Paribas SA strategists led by Bartosz Pawlowski in London wrote in a report today. “We continue to expect a ratings downgrade to Hungary by the end of the month” and “a sub-investment grade rating risks outflows” from the local bond market, the strategists said.

Hungary’s “unpredictable” policies, including the dismantling of checks on policies, levying of extraordinary industry taxes and forcing lenders to swallow exchange-rate losses on loans, are harming investment and growth at a time when the economic environment is deteriorating, S&P said.

Default Swaps

The most indebted of the European Union eastern members got an International Monetary Fund-led bailout in 2008 to avoid default. Prime Minister Viktor Orban rejected renewing the IMF loan after winning elections last year, saying he wanted more freedom to pursue “unorthodox” policies aimed at cutting Hungary’s debt level while trying to meet a campaign pledge to end years of austerity measures.

Hungary cut its offer of Treasury bills Nov. 10 as yields rose to a two-year high and the forint tumbled to the weakest in 2 1/2 years, raising concern the government will struggle to refinance its debt. The state sold 23 billion forint ($100 million) of 12-month treasury bills, short of the 40 billion- forint target, after it failed to raise any debt at a sale of the same maturity on Oct. 27.

The cost of insuring Hungary’s bonds for five years with credit-default swaps is the second-highest in emerging Europe after Ukraine, according to CMA data compiled by Bloomberg. The contracts, which rise as perceptions of creditworthiness worsen, added eight basis points to 575, the highest since March 2009.

To contact the reporters on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net; Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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