Hungarian Prime Minister Viktor Orban, who polls show is on the verge of winning re-election, undercut the bond market rally in his first term by surprising traders with moves including the seizure of pension assets.
While gains of 38 percent on forint-denominated debt were the best among the three major eastern European countries since Orban took office in 2010, those returns shrunk to a region-worst 6.5 percent when adjusted for price fluctuations, according to the BLOOMBERG RISKLESS RETURN RANKING. Polish debt returned 9.2 percent and Czech notes 7.2 percent on a risk-adjusted basis during the period.
Even as Orban won over investors by reducing the biggest debt burden among formerly communist European Union members, he caught them off-guard on several occasions, from appropriating $13 billion of pension assets to saddling banks with mortgage losses to driving out foreign-owned utilities. Those measures fostered volatility in the bond market.
“Investors regarded Hungary’s economic policy as riskier and that had to be compensated with higher yields,” Sandor Jobbagy, a Budapest-based analyst at Intesa Sanpaolo SpA’s CIB Bank unit, said by e-mail on March 26. “Volatility may rise further for partly global and partly Hungary-specific reasons.”
Hungary’s benchmark five-year notes yielded 4.86 percent today, up from 4.75 percent at the end of 2013. The rate was 6.65 percent when Orban took office in May 2010. The forint weakened more than 10 percent against the euro since Orban’s inauguration and traded at 307.22 at 12:36 p.m. in Budapest. The BUX stock index is down 18 percent in the period.
Orban’s Fidesz party is poised to win a two-thirds majority in the legislature in the April 6 election, with the support of 38 percent of eligible voters in a Tarki survey published March 26. The nationwide poll showed a 16 percent backing for an opposition alliance led by the Socialist Party, and the nationalist Jobbik party getting 15 percent, Tarki said without giving a margin of error.
The campaign includes a pledge to offer more assistance to indebted households. His government forced banks to absorb $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates in 2011. Fidesz’s 2014 platform also touts the redistribution of a bigger proportion of profits from utility companies and managed energy-price cuts.
Sudden policy shifts led foreign investors to “look at Hungary and see constant uncertainty,” Gergely Gabler, an economist at Erste Group Bank AG in Budapest, said by phone March 31. “The government will probably try to create a more market-friendly environment. Gaining investors’ trust will be key.”
The nation’s bonds offered returns adjusted for price swings of 0.5 percent this year, worse than all countries apart from South Africa, Australia, Poland and the U.S. in a ranking of 26 sovereign indexes from the European Federation of Financial Analysts Societies. Risk-adjusted returns, which aren’t annualized, are calculated by dividing the total return by volatility. The bigger the daily swings in an asset’s price, the greater the potential for unexpected losses.
The Debt Management Agency sold 78.5 billion forint ($352 million) in bonds due in 2018, 2019 and 2025 at an auction today, 18.5 billion forint more than planned, as borrowing costs fell from the previous auction two weeks ago, according to data from agency on Bloomberg.
Hungary needed to turn around its policies to bring the economy back from the brink of bankruptcy, Orban told a campaign rally in Budapest on March 29 in front of tens of thousands of his supporters. “Our election program can be summed up in one phrase: we’ll carry on the same,” he said in an interview with HirTV the following day.
The Economy Ministry didn’t respond to e-mails and phone calls to the press office seeking comment yesterday on the country’s bond market performance.
Under Orban’s leadership, the budget deficit ratio to economic output held below the EU’s 3 percent upper limit over the last three years, according to figures given by Economy Minister Mihaly Varga on March 31. The debt burden also fell to about 78 percent of gross domestic product last year from 82 percent in 2010, data from the European Commission show.
The yield premium investors demand to own Hungary’s 10-year forint bonds over similar-maturity German bunds has fallen by more than half since January 2012, when the country was considering seeking its second International Monetary Fund bailout in four years.
The government’s ability to obtain financing from the bond market instead of getting a bailout helped spur the debt rally. The 10-year yield, which dropped 3.7 percentage points in 2012, is down 25 basis points this year to 5.68 percent.
Standard & Poor’s raised the nation’s junk BB credit-rating outlook to stable from negative last month. Five-year credit-default swaps insuring Hungary’s debt against non-payment fell to 239 basis points today from as much as 646 in June 2012, according to CMA.
Hungary’s central bank has reduced interest rates at 20 straight meetings, lowering the main rate to a record 2.6 percent last month from 7 percent in August 2012. Demand for the country’s assets was also fueled by the U.S. Federal Reserve’s unprecedented bond purchases over the past five years.
Bondholders “may have punished the swings in economic policy more severely” if it wasn’t for the Fed’s stimulus and local rate cuts in the past two years, Viktor Szabo, who helps oversee more than $11 billion of emerging market debt at Aberdeen Asset Management Plc in London, said by e-mail on March 31.
Even S&P warned when boosting its rating outlook that “less predictable policies toward foreign investors” would constrain economic growth potential.
The 10-year yield will probably climb above 6 percent by the end of 2014, according to the weighted average of four forecasts compiled by Bloomberg, capping the worst performance since 2011.
The government’s seizure of private pension assets was a “slap in the face” for Concorde Alapkezelo Zrt., the fund management unit of Hungary’s biggest broker, its Chairman Laszlo Szabo said.
“We built up a whole business which was basically destroyed,” Szabo, whose company manages the equivalent of $2.1 billion in assets, told reporters in Budapest yesterday. “We were not happy and had a dim view of of the whole asset-management market, but we adapted.”