Hungary is “not far" from reaching a good deal with the International Monetary Fund (IMF), Prime Minister Viktor Orbán told public radio MR1 on Friday, after returning from a meeting with German Chancellor Angela Merkel in Berlin. At the same time, Mihály Varga, Hungary’s chief aid negotiator, said that the country may not even need external financial assistance if the external environment remains favourable. The latest figures on elevated state reserves are also a strong indication that Hungary might not seek an IMF-led financial backdrop so enthusiastically. The still contradictory statements by government officials did not prevent the forint from firming to a three-week high against the euro in the afternoon, close to 280. Meanwhile, Hungary’s closely-watched 5-yr CDS spread dropped to below 300 basis points, which marks the lowest level in more than a year. Thanks to a continuous decline over the past few days the yields on HUF bonds have also dropped close to a 12-m low on the fixed-income market.
10-yr bond yield at two-year low 15:54
Courtesy of the drop in yields over the past few days but especially today’s sharp decline, the yields on Hungarian government securities reached one- and two-year lows on the secondary market today. This has to do primarily with the ever stronger confidence on the market that Hungary will be able to strike a deal with the IMF/EU in a fairly short time. According to Government Debt Management Agency (ÁKK) data, the yields in the 5-yr and 10-yr segments dropped unusually sharply, by 20-27 bps.
The especially important 10-yr bond yield went down to 6.80%, the lowest level in the past two years. The yield on the 5-yr instrument is at 6.35%, also a two-year low.
HUF firms to around 280 vs. EUR - 14:37
Hungary’s forint has started to appreciate markedly over the past 20 minutes or so, which is not linked to external market processes and so far we have no information on Hungary-specific news either. It is unlikely that Varga’s remarks made in Tokyo about Hungary’s loan talks were forint supportive. EUR/HUF went to around 280.50, a three-week high for the forint. The HUF appreciated to around 216 to the USD and to around 232 against the Swiss franc.
In September, Hungary has managed to recoup half of the HUF 410 billion erosion of its financial reserves in August, as a result of which its reserves grew to HUF 2,902 billion, according to Portfolio.hu’s estimates. This is only moderately below the nine-month high of HUF 3,105 bn reached by the end of July. The increase in the ninth month of the year occurred in parallel with the repayment of an IMF loan tranche last month, while at the same time the general government budget posted a surplus, which has not happened in ten years. Keeping a close eye on the state’s reserves is important - among other things - because it can give some guidance for the markets as to how strongly/swiftly the cabinet wants to (successfully) conclude the aid talks with the IMF/EU. Click herefor more.
The vulnerability of the Hungarian economy has decreased significantly and if the external environment remains fundamentally unchanged next year, the country will not need external financing, said Mihály Varga on Friday.
Hungary’s forint is stuck at the bottom of the trading range it has been confined to for one and a half months now, while global investor sentiment is fluctuating but overall negative. The HUF is quoted at 216.80 versus the US dollar and at 232.50 to the Swiss franc on the interbank market.
CDS south of 300 bps - 10:47
Hungary’s 5-year credit default swap (CDS), the cost of insuring Hungary's debt against a default, declined to below 300 basis points for the first time this year. Since the record levels reached early this year way above 700 bps the decrease has been constant. This process was further accelerated by the government’s fiscal adjustment measures announced a week ago and comments by government officials on the IMF/EU credit deal that helped maintain market expectations that the agreement will actually be signed. According to Markit Financial Information Services, Hungary’s 5-yr CDS dropped 23 bps to 298 bps today and went down 70 bps over the past week and 85 bps over the past month.
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