Hungarian Bonds Soar to Record as Limits Placed on Bank Deposits

  • Debt gains after central bank plans cap on benchmark facility
  • Yield on 10-year note drops to as low as 2.71 percent

Hungarian government bonds rose, sending the 10-year yield to a record low, after the central bank said it will spur lenders to keep more cash active in the economy as a way of driving down interest rates and stimulating growth.

Yields on notes due 2027 fell as much as 10 basis points to 2.71 percent, before trading at 2.80 percent by 1:33 p.m. in Budapest. Hungarian bonds are the best performers this month from developing European countries following the country’s promotion to investment grade by Fitch in May and the announcement on Wednesday of limits on deposits at the central bank.

The National Bank of Hungary will place a cap on deposits to its three-month facility in a mode of unconventional easing after policy makers announced in May they were done cutting the base rate, now at a record-low 0.9 percent. The limit means more money should flow into the market and reduce interbank rates.

"We view Hungarian government bonds as the obvious beneficiary of such a change," Morgan Stanley strategist Min Dai in London said in a research note. "Banks that have excessive cash could easily park the cash in government bonds and extend the duration to receive a higher yield."

Hungarian commercial banks currently hold 1.6 trillion forint ($5.7 billion) in the central bank’s three-month facility. Starting in August, the monetary authority will make the facility monthly rather than weekly and then cap its use from October 26. Details on the monthly limits will be published in September and then updated once a quarter.

"We include Hungary in our ‘Like’ list," Dai said. “The risk to the recommendation is that the central bank becomes more uncomfortable about potential capital inflows and prefers a steeper curve.”

The yield on five-year notes fell four basis points to 1.93 percent. Hungary’s forint gained 0.1 percent to 313.9 per euro. The central bank forecasts growth will slow in 2016 to 2.8 percent from 3 percent last year before accelerating to 3 percent in 2017, according to its June inflation report.

The central bank aims to use the benchmark facility to ease or tighten policy and may allow rate-setters to leave the benchmark unchanged “for years,” analysts at OTP Bank said on Wednesday. OTP predicted banks will accumulate government bonds to soak up the extra money that would have normally been deposited at the central bank.

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