Equity 30 May 2019, 10:57am

New inflation-linked government securities offer high interest

Portfolio

Public offering documents for the Premium Hungarian Government Security (PMÁP) available from June 4 have been published on Thursday, revealing that the 1.4% to 1.7% interest premium will remain unchanged. It is important to note, however, that unlike earlier series, these securities will be exempt from the interest rate tax.

Premium Hungarian Government Securities pay the above premium over the previous year's inflation of 2.8% (for a total combined interest rate of 4.2% and 4,5%).

The first interest period will run until September 25 for the 5-year instrument and until September 21 for the 3-year instrument, and interest will be paid on these dates each year until maturity. The interest rate will be set four days before interest is paid.

Based on earlier issues, many have expected the Government Debt Management Agency (ÁKK) to cut the interest premium on inflation-linked government securities as inflation, and thus the interest base of theses instruments, has picked up, meaning that Hungary will have to pay a higher overall nominal interest on the PMÁP series over the following years.

Previously, yields from the securities were subject to a 15% interest rate tax, but the new 2022/L és 2024/J series will be exempt from this tax.

It is also important to note that a completely new kind of retail government security, the Hungarian Government Bond Plus (MÁK+), formerly known as the National Government Bond, will be offered to investors as of June 3. This will offer step-up interest that, all other things being equal, will result in even higher annual net yield than the PMÁP if held until maturity.

Our calculations show that at last year's inflation base, the MÁK+ (formerly National Government Bond) offers a higher yield, but as inflation picks up, the PMÁP could easily overtake its "rival" as the MÁK+ has fixed (step-up) interest and is not linked to inflation.