Hungary's Regulatory Action Pushes Bond Yields to Record Low

Hungary’s bond yields fell to a record low at an auction on Thursday as policy makers sought to push investors to buy more longer-term public debt.

The government’s debt agency raised 79.5 billion forint ($284 million) at the sale of three, five and 10-year notes, 24.5 billion forint more than planned. Yields on the three- and five-year securities fell to all-time lows of 1.52 percent and 2.3 percent, respectively.

The National Bank of Hungary has moved to a new benchmark instrument and introduced stiffer liquidity regulations to entice investors to buy more government debt instead of using central bank deposits. In addition, as Treasury bill yields plummeted, the debt agency lowered the amount of bills offered and the monetary authority proposed to assume investors’ interest rate risk to extend the maturity profile of holdings.

"Yields are expected to decrease further on five- and 10-year maturities, resulting in the flattening of the yield curve," Szilard Kondora, an economist at OTP Bank Nyrt. in Budapest, said by phone. The yield premium on Hungary’s 10-year note over the corresponding German Bunds will probably move toward a record low, Kondora said.

The debt agency sold 20 billion forint in three-month Treasury bills on Tuesday after curtailing the offered amount and receiving just 25 billion forint in bids. The average yield was 0.39 percent, within one basis point of the record low reached last month.

"The surprisingly weak demand at Tuesday’s three-month Treasury bill auction could be a sign that investors prefer longer tenors in search for yield," Stephan Imre, a Vienna-based economist at Raiffeisen Bank International AG, said in a note on Thursday. "This would be highly welcomed by authorities that are trying to push more local investors into longer government bonds."