For investors in Hungarian bonds, the question now is how low can interest rates go?
As prospects for more European Central Bank stimulus have sent bond yields across the continent lower, traders are betting Hungarian policy makers still have room to reduce rates after they cut the benchmark yesterday for the 22nd straight month. With borrowing costs falling below those of Poland (POREANN) for the first time since 2002, the yield premium between the nation’s 10-year bonds shrank to the least since January this week.
Hungary’s policy makers extended easing as government-imposed energy-price cuts pushed the inflation rate below zero, with the scope for further reductions depending on inflation forecasts next month. The ECB, whose President Mario Draghi pledged to avert a “negative spiral” of low inflation in the euro area, will probably loosen policy next week, according to 47 of the 52 economists in the Bloomberg Monthly Survey.
In Hungary, “even when the terminal policy rate is reached, I expect the central bank will insist that policy will be kept loose for a long time,” Abbas Ameli-Renani, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in e-mailed comments yesterday. “Add that to increased ECB dovishness and you can start seeing room for further gains in the local market.”
The yield on 10-year forint bonds fell 1.11 percentage point this year to a record 4.82 percent on May 26, narrowing the spread with similar-maturity Polish debt to 1.13 percentage point, the least since January. The yield was at 4.94 percent as of 10:50 a.m. in Budapest. The forint weakened 0.2 percent to 304.15 per euro, declining for a third day.
Hungary’s policy makers cut the main rate by 10 basis points, or 0.1 percentage point, yesterday to a record 2.4 percent, from 7 percent when the easing cycle started in August 2012, to bolster recovery from recession.
While the central bank last month said borrowing costs approached the level consistent with the inflation target, “global investor sentiment has been supportive in the past month,” the bank said in a statement on its website yesterday.
“Anticipation of a favorable environment for emerging-market assets stemming from further ECB stimulus” is providing Hungary’s policy makers with further ammunition for easing, Phoenix Kalen, a London-based strategist at Societe Generale SA, wrote by e-mail yesterday.
The ECB will probably cut both its benchmark rate, now at 0.25 percent, and deposit rate, which is at zero, when it meets on June 5, according to 29 economists in the Bloomberg survey.
While easing in Hungary and the euro area have supported the bond rally, there’s probably a limit to how long it will last, according to Akos Horvath, a Budapest-based analyst at broker Equilor Befektetesi Zrt.
“While Hungary still has a significant yield premium over Poland, the increasingly lower base rate may steer investors toward other markets” as they hunt for higher returns, Horvath said by e-mail yesterday.
Hungary’s easing cycle will probably end at 2.2 percent, JPMorgan Chase & Co. and Goldman Sachs Group Inc. said e-mailed reports yesterday. Morgan Stanley says it will go further.
The bank “clearly left the door open to more cuts in the next few months,” Pasquale Diana, a London-based economist at Morgan Stanley, wrote in a research report yesterday, who predicts the rate will drop to 2 percent. “The obvious risk to a view that sees more rate cuts is an abrupt change in the global backdrop.”
To contact the reporter on this story: Andras Gergely in Budapest at firstname.lastname@example.org