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Hungary Yields Rise to 5-Week High Before Sale on Rates Outlook

Hungarian yields rose to a five-week high before a debt sale tomorrow as investors increased bets the central bank will keep the European Union’s highest benchmark rate on hold to protect the currency amid delays in bailout talks and a worsening debt crisis in the region.

The existing 2015 securities fell a second day, lifting yields 12 basis points, or 0.12 percentage point, to 8.46 percent by 3:48 p.m. in Budapest. The Debt Management Agency will offer 40 billion forint ($167 million) in notes maturing in 2015, 2017 and 2022 at the biweekly sale tomorrow.

Hungary’s Magyar Nemzeti Bank left the two-week deposit rate at 7 percent for a fifth month yesterday, saying a “cautious policy stance” was needed. The most indebted eastern member of the EU has failed to start talks on International Monetary Fund this year because of a dispute on laws affecting the central bank independence. The forint is headed for its worst month since September as concern deepened Greece would abandon the euro.

“The Hungarian central bank sounded slightly hawkish at the May meeting,” Tomas Vlk, a Prague-based economist at KBC Groep NV’s Patria Finance unit, wrote in a research report today. “It supports our view that in the near future a rate cut is unlikely.”

Forward-rate agreements used to bet on three-month interest in nine months rose nine basis points to 7.21 percent today after a four basis point increase yesterday. The FRAs traded two basis points above the Budapest Interbank Offered Rate, indicating expectations for unchanged rates in the next three quarters.

Bank Independence

The forint depreciated 0.7 percent to 299.75 per euro, extending losses this month to 4.4 percent.

Hungarian law doesn’t meet “all the requirements for central bank independence,” the European Central Bank said today in an analysis of non-euro member countries’ economic convergence.

The forint earlier reversed losses after the European Commission recommended lifting a planned suspension of Hungary’s infrastructure subsidies after Prime Minister Viktor Orban’s government took “effective action” to cut its budget deficit, commission President Jose Barroso told reporters in Brussels today.

Demand for riskier assets fell across Europe as Italy failed to meet its maximum target at a debt sale, Spain struggled to bolster its banking system and a poll showed most Greeks want to see the terms of an international financial rescue revised.

The lifting of Hungary’s aid suspension may help move the country closer toward starting bailout talks, Timothy Ash, a London-based strategist at Royal Bank of Scotland Group Plc, wrote by e-mail today.

“This puts the ball back in the government’s court,” Ash said. “The problem is that the central bank law is still not compliant.”

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