Hungary Yields Reach 2-Year High on Junk Rating Before Sale

The yield on Hungary’s five-year bonds climbed to a two-year high before an auction tomorrow as a credit-rating downgrade to junk by Moody’s Investors Service damped investor appetite for the country’s debt.

The government is offering 15 billion forint ($65 million) in 2014 bonds, 12 billion forint in 2017 notes and 8 billion forint in 2022 securities, according to data from the Debt Management Agency on Bloomberg. The five-year yield rose five basis points to 9.357 percent at 11:51 a.m. in Budapest, near the 9.57 percent reached on Nov. 25, the highest since July 2009 and the first trading day after the rating cut by Moody’s.

The central bank increased the benchmark interest rate to the highest in the European Union yesterday and said it may boost borrowing costs further after the Moody’s downgrade pushed the cost of insuring against Hungary’s default to a record high last week.

“The bond market appears to be in meltdown,” Neil Shearing, London-based chief emerging-markets economist at Capital Economics, wrote in a research report yesterday. Policy makers may need to initiate “far larger” rate increases to shore up bond and currency markets after yesterday’s attempt “flopped,” Shearing said.

The forint depreciated 0.8 percent to 311.84 against the euro, heading for a fifth straight month of declines.

‘Become Impossible’

Hungary, which on Nov. 17 said it would seek assistance from the International Monetary Fund, scrapped two debt sales and reduced the size of another eight auctions in the past three months, including a Treasury bill sale this week. The debt agency accepted no bids after investors offered 27.6 billion forint in 2012 bonds at a buyback auction today.

“We think that the situation for Hungarian government bond auctions will remain difficult throughout the first half of 2012 and see risks that the refinancing via the markets could become impossible,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG, and colleagues wrote in a research report yesterday.

Investments in Hungary dropped 5.4 percent in the third quarter from a year earlier as higher spending in manufacturing and government failed to outweigh declines in the banking and energy industries, data from the statistics office showed today.

“The global backdrop is negative today and central European currencies are at risk,” Bartosz Pawlowski, a London-based strategist at BNP Paribas SA, and colleagues wrote in a research report today. “We could see renewed pressure on the forint.”

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