Hungary’s cost of protecting against default soared the most in three years, bond yields jumped and the forint plunged as the U.S. Federal Reserve said it may phase out stimulus that has stoked a global debt rally.
The cost of insuring Hungary’s debt with credit-default swaps jumped 44 basis points to 352, the biggest advance in percentage terms since June 2010, according to data compiled by Bloomberg. Yields on benchmark 10-year government bonds jumped 28 basis points, or 0.28 percentage point, to 6.24 percent at 5:18 p.m. in Budapest, the highest since June 11. Hungary’s currency depreciated 1.3 percent to 298.5 per euro.
Emerging-market assets plummeted after Chairman Ben S. Bernanke said the Fed may start reducing bond purchases this year and halt the program around mid-2014 as long as the world’s largest economy performs in line with its projections. Hungary’s Monetary Council, which cut its main rate to a record 4.5 percent by last month, is “ready to act” if the financial market environment was to “fundamentally reverse,” newspaper Napi Gazdasag reported, citing policy maker Janos Cinkotai.
“Investors are reducing positions across emerging markets,” Andras Hont, a fixed income and currency trader at Solar Capital Markets Zrt., said by phone from Budapest today. “Rising developed-market yields are reducing the premium on Hungarian assets, that’s what is hurting Hungarian bonds.”
The forint extended its three-day decline to 2.6 percent, the biggest loss among emerging-market currencies outside Latin America. The benchmark BUX stock index slid 1.5 percent, extending its four-day slump to 4.1 percent.
Cinkotai cited two 50 basis-point interest-rate increases in 2011 in response to market turbulence as an example that policy makers can protect the country’s financial stability, according to the Napi Gazdasag interview. The central bank didn’t immediately respond to e-mailed questions from Bloomberg News asking for further comment.
The Magyar Nemzeti Bank is set to cut its benchmark rate by a further 25 basis points on June 25, according to all 15 analysts in a Bloomberg survey.
Hungary’s 10-year yields fell to a record 4.93 percent on May 16 as the central bank eased monetary policy and as Prime Minister Viktor Orban’s government took steps to keep the budget deficit below the European Union’s 3 percent of gross domestic product limit. EU finance ministers meet this week to discuss the European Commission’s recommendation to end a budget monitoring procedure against Hungary for the first time since the formerly communist nation joined the bloc in 2004.
The budget measures, which reduced the budget shortfall to 1.9 percent of output last year from 4.3 percent in 2010, have helped reduce Hungary’s vulnerability to market shocks, Daniel Bebesy, who helps manage who helps manage $1.5 billion at Budapest Fund Management, said by phone today.
The Cabinet plans to raise taxes on financial transactions and phone calls to ensure the deficit remains below 3 percent, Economy Minister Mihaly Varga said on June 17.
“The tax increases and austerity measures ensure that the prospect of a default doesn’t arise, the government is doing everything to avoid that,” Solar Capital’s Hont said. “The economic fundamentals are fine from that point of view.”
Hungary’s Debt Management Agency raised a planned 50 billion forint ($220 million) in 12-month Treasury bills at an auction today, according to data from the agency on Bloomberg. The average yield was 4.56 percent, the highest since March and up 40 basis points from the last sale on June 6, the data showed.
“Volatility will probably remain high in coming months,” Sandor Jobbagy, a Budapest-based economist at CIB Bank Zrt., a unit of Intesa Sanpaolo SpA (ISP), wrote by e-mail today. “That won’t necessarily mean continuous weakening in Hungarian assets though. If the Fed can manage expectations well, then there won’t be any panic.”
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