Hungary gov't securities creep towards historic low

Hungarian bonds in high demand

There have been interesting developments in the Hungarian government securities market in recent weeks as the Government Debt Management Centre (ÁKK) is not trying to sell bonds above the planned amount at its auctions at all costs, which, given the favourable external conditions, has led to a substantial drop in yields.

In May, primary dealers submitted bids totalling around HUF 800 billion on the HUF 388.8 bn total amount of government securities offered, which led to the ÁKK raising its offer slightly to HUF 396 bn. The debt manager appeared to try and sell more than the planned amount in the case of bonds primarily, which represent safer financing at longer maturities.

We have seen similar processes in June as well, as the volume of government securities sold at auctions was HUF 3 bn above the planned amount at more than double oversubscription. Moreover, demand was stable across all maturities, with the ÁKK selling more than the planned amount of five- and 15-year bonds.

Looking at recent months, it appears the ÁKK does not intend to sell significantly more than the planned amount despite the outstanding demand, even though retail sales in the first five months of the year were below the projected amount, which may mean it had confidence in the success of the new 'super" retail security all along.

Yields plummet

It is also worth taking a look at yields, which also give no cause for complaint as the secondary market benchmark yield of Hungarian treasury bills decreased significantly in both May and June.

The tend was particularly visible in the case of bonds as the benchmark rate of the 3-year bond fell 49bp in less than two months, while 5-year bonds shed 47bp and 10-year bonds 50bp.

This means the yields of long-term government bonds are nearing their all-time lows, with the 10-year bond's current 2.6% yield the lowest since last spring. (There was a dip early in 2018 when reference yields dropped below 2% for a short time.)

The Hungarian market was not the only one in the region to experience these trends, which hints at international developments as the primary factor in moving the yields. Yields in Poland and the Czech Republic dropped a comparable amount, and there have been similar developments in Western European bond markets as well.

But what has been moving the government securities market so strongly in recent weeks? The foremost answer is expectations on central bank policies. The ECB launched a new long-term refinancing programme (TLTRO-III) for banks this spring, and the bank's president has since indicated his willingness to do whatever it takes to meet the 2% inflation target. This represented a major turnaround compared to expectations early in 2019, when investors anticipated an interest rate hike by the ECB sometime in the second half. The bank has now firmly moved towards loosening its policy, and not even the most extreme current expectations foresee tightening before the middle or end of 2020.

Meanwhile, the Fed has also made an about-face as some decision-makers were for a loosening in June after several years of increasing interest, and investors are now pricing in two or three 25bp rate cuts before the end of the year. This is primarily because the U.S. economy is expected to slow considerably after its 3.1% Q1 growth.

As such, a looser central bank policy may indeed be justified provided that the European economy is in a slump and growth in the U.S. is actually slowing.

These global developments have apparently had an impact on yields in Hungary as well. Relatively speaking, Hungary's position has not improved as much as it may appear, considering that the difference between 10-year interest rates in Germany and Hungary has only decreased by 15bp since April, while Polish yields have dropped faster.

There has been one more interesting thing in the Hungarian market: in recent days, after the National Bank of Hungary (MNB) announced its rate decision, three-month benchmark yields suddenly jumped 15bp to 0.22%. This is surprising since the Monetary Council has not changed the base rate and expectations have swung towards a loosening. This rise in yields may be connected to last week's temporary liquidity shortage when liquidity dried up and interbank rates rose sharply.

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• ÁKK,
• economy,
• government security,
• auction,
• bond,
• yield