Hungarian Bonds Rise as Fitch Move Fuels Second Upgrade Optimismby
Fitch lifted credit score to BBB- from BB+ on Friday
Second upgrade needed to lure investment-grade debtholders
Hungary’s government bonds rallied the most in a month after the eastern European nation was raised to investment grade at Fitch Ratings.
The country’s debt headed for the biggest advance in a month after Fitch lifted Hungary’s long-term rating one step from junk to BBB- on Friday. The upgrade surprised some investors who had seen increased risk of a delay after Prime Minister Viktor Orban announced plans to boost spending in the run-up to parliamentary elections in 2018.
The decision “may boost bets for a second upgrade later on in the year,” said Peter Virovacz, an economist at ING Groep NV’s Hungarian unit. “That’s causing a positive reaction in bonds after the recent declines.”
The return to investment grade is the latest stage in the healing process for Hungary’s $120 billion economy, which needed an International Monetary Fund bailout in 2008. As the economy slid into a recession, Orban nationalized $11 billion of private-pension assets and introduced Europe’s highest bank levy. The government has since rid households of burdensome foreign-currency loans, narrowed the budget deficit and trimmed the bank tax.
Hungary will need a similar second upgrade from either Moody’s Investors Service or S&P Global Ratings to lure funds that hold investment-grade debt. Such a move would cut Hungary’s debt-service costs by as much as 60 billion forint ($214 million) in the next 12 to 18 months, Economy Minister Mihaly Varga said Saturday.
Hungary’s 10-year forint bonds pared the biggest slump among eastern European peers over the past month, with yields falling eight basis points to 3.36 percent as of 1:24 p.m. in Budapest. Rates on the country’s $2 billion note due 2024 fell seven basis points to 3.75 percent, the biggest drop in three months.
While yields on 10-year government debt surged to as high as 10.7 percent after Hungary’s first downgrade in 2011, waning returns in developed markets, central bank interest-rate reductions and improved public finances have since helped cut borrowing costs.
"Bond valuations are already consistent with a higher credit score, so it’s more a case of the rating firm following the market, than the other way around," said Gyula Lencses, a money manager who helps oversee the equivalent of $550 million at Raiffeisen’s fund unit in Budapest. "There’s more value in the bonds after the recent slump and investors may start betting on a second upgrade that would lure inflows from funds with stricter mandates."
With Fitch citing European Union fund inflows as a catalyst for Hungary’s improving current-account balance and falling external debt, that recovery may be in peril if British voters decide to leave the 28-nation bloc at a June 23 referendum. That’s prompting Raiffeisen’s Lencses to see a second upgrade in November at the earliest.
Moody’s, which has held a positive outlook since November on Hungary’s rating, kept at the highest junk grade, has scheduled reviews for July and November. S&P, which also keeps the nation at the highest non-investment-grade level, has a stable outlook and may revisit its score in September.
"The positive surprise from Fitch’s upgrade will support a stronger forint and lead to stronger demand for Hungarian government bonds given the attractive valuation," said Dan Bucsa, an economist at UniCredit Bank AG in London. "However, no clear trend is expected as the Brexit referendum will weigh on general risk sentiment."