Hungary’s bond yields fell to the lowest in 2 1/2 years as the inflation rate dropped to an 11-month low and demand for riskier assets grew, giving the central bank more room to cut interest rates. The forint gained.
The yields on 10-year notes dropped 14 basis points, or 0.14 percentage points, to 6.435 percent, the lowest since April 2010. The forint appreciated 0.5 percent to 282.0 per euro by 4:08 p.m. in Budapest, the strongest in a week. Foreign investors held 5 trillion forint ($23 billion) in forint-denominated debt as of today, 0.1 percent shy of a record reached at the end of last week, according to data from the Debt Management Agency.
The inflation rate fell to 5.2 percent in November, the lowest since December and compared with the central bank’s 3 percent target, statistical data showed today. The Magyar Nemzeti Bank’s benchmark rate is 6 percent, the European Union’s highest, after policy makers cut it by a cumulative one percentage point in the past four months citing improvement in investor sentiment. Investor confidence in Germany, Hungary’s biggest export market, jumped to a seven-month high, data showed today.
“The slowing inflation path may support the continuation of central bank rate cuts,” Zoltan Reczey and Gergely Palffy, analysts at Buda-Cash Brokerhaz Zrt., wrote in a research report. “The favorable international sentiment and the relatively strong forint rate are at least as important as inflation for the monetary easing.”
The central bank will cut rates to 5.75 percent this month “as risk appetite continues to remain strong due to the global hunt for yield,” Zoltan Arokszallasi and Orsolya Nyeste, Budapest-based analysts at Erste Group Bank AG, wrote in a research report.
End-year flows into domestic bond funds and an upcoming swich in the bonds the debt agency uses as the benchmark also added to the gains, Krisztian Toth, a fixed income trader at BNP Paribas SA in Budapest, said by e-mail.
“Beyond the real foreign interest in Hungarian debt, technical elements are also underpinning the rally,” Toth said.
The debt agency sold 65 billion forint in three-month Treasury bills at an auction today, 15 billion forint more than planned and the biggest amount since July 2009. The average yield was 5.77 percent, the lowest since September 2011.
The central bank’s interest rate cuts have been “successful” as they helped steer the economy toward sustainable growth without posing inflationary risks, Andrea Bartfai-Mager, a member of the rate-setting Monetary Council said at a conference in Budapest today.
Hungary has benefited from liquidity-boosting central bank measures in Europe and the U.S. and the country’s positive risk assessment may prevail for six months to a year, Bartfai-Mager said.
The debt management agency may return to the Eurobond market in the first quarter of 2013 for the first time since May 2011 after “testing” investor appetite, Mihaly Varga, Hungary’s chief aid negotiator, said at a conference in Budapest today.
Hungary, which requested aid from the International Monetary Fund more than a year ago, now sees its financing secure for 2013, provided the market environment remains supportive, Varga said.