Yield curve analysis - Is there no indication for Hungary's euro zone entry?

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In our analysis we look back on three to four months and give a projection on yield moves and the introduction of the euro on the basis of a few snapshots on the market.
In April, yields on the majority of emerging markets started to rise considerably in the wake of intensifying rate hike expectations on emerged markets. Moreover, the exchange rates of national currencies also showed significant fluctuations.

Hungary’s forint has eased markedly against the euro, but the yields of longer bonds are now about 70 basis points higher than in April. In the shorter segment it is mostly rate cut expectations that have been moving the market. Yields here are about 30 bps higher now than in April. This may indicate that the market is of a more favourable opinion about inflationary processes and also that other risk premia at longer bonds have gone up.

One of the cornerstones of our logic is that long bonds are already redeeming in euros and issuances will also have to be euro-based in a few years’ time. Should this be the case, premia should go down, currency risks will be taken out of pricing and only other country specific factors will remain.

To this end it is worth examining the difference between the expected yields. To put it a little bit bluntly, we could say that if the premium slipped to levels where it is at Hungarian government bonds that are issued in euros (40-50 bps), the currency risk would be practically non-existent. What we would have on our hands is basically a euro-denominated bond then.