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Hungary’s Bonds Rally Most in Three Months on Rate Cut Bets

Hungary’s bonds rallied the most in almost three months on bets talks of a bailout by the International Monetary Fund will allow the central bank to cut interest rates.

Yields on benchmark forint-denominated notes due in 2022 retreated 34 basis points, or 0.34 percentage point, to 7.618 percent, the biggest drop since April 25. Yields are at the lowest since September. The forint strengthened 0.6 percent to 288.16 per euro by 4:14 p.m. in Budapest, capping a 0.5 percent gain this week.

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 on July 11 in a joint interview in Budapest.

“This is a very strong hint at the stance of the monetary policy, rare in its kind in recent monetary history of Hungary,” Janos Samu, a Budapest-based economist at broker Concorde Ertekpapir Zrt., wrote in a research report today on the two rate setters’ comments.

Hungary’s government is aiming to strike a loan deal with the IMF which “acts as a safety net, reduces risks and leads to lower rates along the entire length of the yield curve,” the office of Mihaly Varga, the government’s chief negotiator with the IMF, wrote in an e-mailed response to questions from Bloomberg today.

Hungary yesterday raised 61 billion forint ($257 million) in bonds, 17 billion forint more than planned, at an auction, according to results from the Debt Management Agency on Bloomberg. The sale included 30 billion forint in 2015 debt at an average yield of 7.44 percent, the lowest for that maturity since October.

Rate Cut

The Magyar Nemzeti Bank on June 26 left its benchmark interest rate unchanged at 7 percent for a sixth month.

“Rate cut expectations are still at play following this interview,” Gaelle Blanchard, a London-based strategist at Societe Generale SA, wrote by e-mail today, referring to the comments by Gerhardt and Kocziszky this week.

Demand for riskier assets rose today after slower-than-estimated expansion in China’s economy and a lower growth target from South Korea’s central bank fueled speculation about more economic stimulus.

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