Hungary 5-Year Bond Yields Fall to 2 1/2-Year Low at Auction

Hungary sold five-year bonds at the lowest cost in 2 1/2 years at an auction today as demand for riskier assets rose and on bets the government will obtain a bailout deal.

The Debt Management Agency raised 49 billion forint ($232 million) from bonds maturing in 2015, 2017 and 2022, 2 billion forint more than planned. The issuance included 13 billion forint of 2017 notes sold at an average yield of 6.03 percent, the lowest for that maturity since April 2010. Borrowing costs fell for the other two securities. The forint fell 0.2 percent to 278.64 per euro by 4:24 p.m. in Budapest.

Prime Minister Viktor Orban’s Cabinet, which requested aid from the International Monetary Fund and the European Union 11 months ago, yesterday unveiled plans to raise taxes on the financial services industry to keep the budget deficit within the EU’s prescribed limit of 3 percent of gross domestic product. An agreement with the IMF is “very close,” Orban said in an interview in Bucharest yesterday, declining to give a date. He said Hungary doesn’t need money from the IMF and is seeking a credit line as a precaution.

“Hungarian bonds have performed very well in the past month, thanks both to positive risk sentiment and the market’s optimism that the IMF/EU deal will be reached at some point,” Esther Law, a London-based strategist at Societe Generale SA, wrote in an e-mail today.

Rate Cut

The government sold an additional 6.8 billion forint of 2015 and 2022 bonds at a non-competitive tender after the auction today.

Hungary’s central bank cut its benchmark rate by 25 basis points to 6.5 percent last month, still the highest in the European Union, after a similar reduction in August to help stimulate the nation’s recession-hit economy.

“Demand for short-dated paper should also continuously to be supported by the central bank’s easing stance,” Societe Generale’s Law wrote.

The steps announced yesterday to curb the shortfall were needed to prevent the European Commission cutting off development aid to the country, Economy Minister Gyorgy Matolcsy told reporters yesterday. The Cabinet understands the importance of international assistance even if it comes at the cost of hurting economic growth, according to Erste Group Bank AG.

Hungary’s measures to plug the deficit won’t be considered sustainable by the IMF and EU, Raffaella Tenconi and Mai Doan, London-based economists at Bank of America Corp., wrote in an e-mailed report today.

Risk Assets Rally

“We have been bullish on Hungarian fixed income assets for most of the year, but have turned more cautious on the IMF-EU deal,” the economists wrote.

Emerging-market stocks rose, driving the benchmark index to the highest in five months, as Chinese data signaled growth in the world’s second-biggest economy picked up in September.

Developing markets have rallied as monetary easing in the U.S. benefited higher yielding markets such as Hungary even as the government in Budapest imposed more levies on banks, Tim Ash, a London-based strategist at Standard Bank Group Ltd, said in e-mailed comments. The IMF will oppose filling budget holes by increasing revenues instead of cutting spending, Ash said.

“Yet another round of kicking foreign banks will hardly win Hungary friends,” Ash said. Hungary’s credit markets have rallied “simply on the back of liquidity,” he said.

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