Hungary sold three-year debt at the lowest yield in almost nine months at an auction today on speculation that talks on a bailout from the International Monetary Fund will allow the central bank to cut interest rates.
The government raised 61 billion forint ($257 million) in bonds, 17 billion forint more than planned, at the sale, according to results from the Debt Management Agency on Bloomberg. The agency sold 30 billion forint in 2015 debt at an average yield of 7.44 percent, the lowest for that maturity since October.
The planned start on aid talks with the IMF and European Commission next week creates room to begin monetary easing, central bankers Ferenc Gerhardt and Gyorgy Kocziszky said yesterday in a joint interview in Budapest. The Magyar Nemzeti Bank on June 26 left its benchmark interest rate unchanged at 7 percent for a sixth month, with rate-setters voting six to one, according to minutes of the meeting posted on the bank’s website yesterday.
“The dovish Monetary Council members’ comments were the positive catalyst, it was increased rate-cut expectations that pulled down the yield curve,” Andras Sovany, a Budapest-based fixed-income trader at ING Groep NV, wrote in an e-mailed response to questions from Bloomberg after the auction.
Three-year bond yields rose to 7.63 percent yesterday from 7.47 percent on June 29 on concern that plans to tax the central bank undermine its independence and threaten the IMF bailout talks.
Lawmakers led by Prime Minister Viktor Orban’s Fidesz party approved on July 9 levying a tax on financial transactions that would also apply to the central bank and the state Treasury to help compensate for a reduction in payroll taxes. Magyar Nemzeti Bank President Andras Simor told reporters in Budapest on July 2 that the move would violate central bank independence by limiting the use of its assets and is illegal. Hungary won’t alter the levy even at the European Central Bank’s request and will only accept IMF conditions for aid that serve the national interest, Orban said in a HirTV interview on July 10.
“The market remains cautious as next week’s meetings with the IMF may still bring surprises,” ING’s Sovany said.
The agency sold 21 billion forint in 2017 notes at 7.73 percent today, compared with 7.84 percent two weeks ago. The agency raised 10 billion forint in securities maturing in 2022 at an average yield of 7.82 percent, compared with 8.50 percent when they were last sold on June 14. The government raised an additional 1.7 billion forint from the three maturities at a later, non-competitive tender.
The IMF and European Union probably “will have troubles with the financial transaction tax, causing further delays to backstop negotiations only a week after the central bank independence issues have been resolved,” Peter Attard Montalto, a London-based analyst at Nomura International Plc, wrote in a July 10 research report.
Orban’s cabinet requested aid from the IMF and the EU in November after the forint weakened to a record low against the euro and government yields jumped to the highest in more than two years.
The international lenders refused to start negotiations on concern a law passed in December that allowed the government to nominate policymakers without consulting the central bank threatened its independence. The EU agreed to begin talks last week after Parliament amended the legislation.
Hungarian assets will face a “sell off into September” as investors realize how long it will take to reach a deal, Montalto said in e-mailed comments yesterday.
The forint, which rallied 10 percent against the euro in the first half of this year, is the third-worst performer worldwide so far this month after Romania’s leu and the Sudanese pound, dropping 0.8 percent in July to 288.36 per euro by 4:08 p.m. in Budapest.
“Once market conditions have improved and the forint is off the dips, the government is not shy starting new conflicts,” Daniel Lenz, a Frankfurt-based emerging-market strategist at DZ Bank AG, wrote in e-mailed comments yesterday.
The first round of aid negotiations between the EU, its most-indebted eastern member and the IMF will take place between July 17 and 25, Mihaly Varga, the minister in charge of the talks, said in a televised interview on July 9, adding that the negotiations will be “tough.”
“I doubt that the government really takes a U-turn on its whole strategy” of acquiring aid, Lenz said. “It still seeks an IMF loan, given that the euro-zone crisis and stressed market conditions could prevail for a long time.”
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