The National Bank of Hungary’s plans to channel banks’ cash into government notes sent three-year bond yields below rates on similar Polish notes for the first time since 2002.
The yield on Hungary’s forint-denominated bonds maturing June 2018 fell five basis points to 2.08 percent, below 2.09 percent for Polish notes due April 2018. Poland’s yields were as many as 60 basis points higher three weeks ago, before a selloff triggered by victory for the opposition candidate in presidential elections.
Hungary’s debt rallied after officials announced changes to their monetary-policy framework on Tuesday in a bid to encourage banks to invest their excess cash in government bonds rather than in central-bank deposit instruments. The measures, which include switching the benchmark interest rate to a three-month deposit instrument from a two-week facility from September, may increase demand for state debt by up to 750 billion forint, according to the monetary policy authority.
“The overall impact of the announced central-bank policy changes will likely be strongly supportive for the Hungarian fixed-income markets,” Phoenix Kalen and Roxana Hulea, London-based strategists at Societe Generale SA, said in an e-mailed report late Tuesday. The steps “disproportionately favor increased holdings of short-dated government bonds,” they said.
Hungarian bonds are also benefiting from the prospect the country may be returned to investment grade. In Poland, Andrzej Duda defeated the incumbent in the May 24 run-off, spurring a selloff amid concern policy changes would be unfriendly to the markets. Hungary’s local-currency bonds have returned 0.8 percent in the past month, compared with a 1.1 percent loss on Polish notes, according to data compiled by Bloomberg.
Hungary’s debt-management agency said it will continue to sell notes as per its annual issuance plan, suggesting it won’t raise sales to meet the higher demand. “The changes will help the further reduction in the share of foreign-currency debt, which improves Hungary’s risk assessment,” the agency said in an e-mailed statement.
Hungarian lenders will face tougher liquidity and collateral terms if they continue to keep their funds with the central bank after the changes take effect.
“Buying government debt will be much more attractive for banks,” central bank Executive Director Marton Nagy said.