Hungary Bonds Yield Less Than Poland for First Time in 14 Years

  • Hungary's bonds rally on monetary easing, potential upgrade
  • Polish policy makers resisted cutting rates for over a year

The National Bank of Hungary’s moves towards easier monetary policy have sent yields on the country’s bonds below those on equivalent Polish notes for the first time in 14 years.

The yield on forint-denominated bonds maturing October 2027 traded at 2.93 percent on Thursday, compared with 2.97 percent for Polish notes due July 2026. Hungary’s debt has rallied since policymakers delivered a surprise rate cut on March 22, the first in eight months, with the yield on the benchmark note dropping nine basis points. Polish yields rose 12 basis points in the period, overtaking Hungary’s for the first since 2002.

"The central bank in Hungary appears to be in a mood for keeping monetary policy very loose," William Jackson, a senior emerging-markets economist at Capital Economics in London, said by phone.

Policy makers pledged to keep easing rates "as long as monetary conditions became consistent with the sustainable achievement of the inflation target.” Hungary’s central bank lowered the rate to a record 1.20 percent from 1.35 percent, defying 18 of 19 forecasts by economists for no change. It had avoided stimulus for seven months but last month reversed a pledge to keep its benchmark rate on hold until the end of 2017.

Jackson forecasts a further 45 basis points of cuts this year will bring the benchmark rate to 0.75 percent by the end of the year.

Diverging Policy

In contrast, Polish policymakers are refusing to cave in to the longest bout of deflation in 60 years, partly caused by lower energy prices, and have kept borrowing costs on hold since March 2015. Interest rates are at a “certain equilibrium” leaving no need for easier policy, Governor Marek Belka said last week after the central bank kept its key rate unchanged at 1.5 percent for a 13th month.

Hungarian bonds are also benefiting from speculation the country may regain an investment grade rating. The difference between credit-default swaps insuring Hungary’s debt against default and those of investment-grade rated Romania is the smallest this year. The spread between the contracts narrowed to 24 basis points from 45 basis points in February, signaling traders see their creditworthiness converging. Fitch Ratings is scheduled in May to publish a review on the country which currently sits at the top end of junk status at all the three of the major ratings firms.

While Hungary’s rating is tipped for upgrade, Standard & Poor’s in January cut Poland’s rating for the first time since the collapse of communism, citing government meddling in the country’s institutions. S&P affirmed its BB+ rating for Hungary on March 18 and said it would consider raising its assessment if growth led to a “faster reduction” in government debt levels, or if policy-making becomes “more transparent and predictable.”

"The yield spread might widen a little bit more -- not by as much as it has done," Jackson said. "It’s the question of how far Hungary’s easing cycle has to run."

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