Hungary debt manager cuts interest premium on 5-yr bond
1.25% premium for five years
According to the recently published information, the interest premium on the latest tranche of PMÁP will only pay a 1.25% interest premium, down from the previous 1.4%. Inflation-linked government bonds offer an interest premium above the average annual inflation as published by the Central Statistical Office (KSH).This premium is currently 1.25% for 5-year and 1% for 3-year bonds. (For comparison, the respective figures were 1.7% and 1.4% for the tranches issued in 2019.)
The 5-year inflation-linked bond issued from 20 January will first pay interest in July, a prorated 2.26% of the 4.55% annual interest, which includes last year’s 3.3% inflation.
Future inflation figures will have a major impact on interest payments, and it can be assumed that the ÁKK had a good reason to cut the interest premium.
This indicates that the debt manager expects inflation to rise in the near future.
The next tranche of the 3-year PMÁP is also expected to offer a lower premium in order to re-open the gap between the two tenors, as at present the 5-year bond only pays 25 bp more.
Inflation could reach 3.5% this year
According to analysts polled by Portfolio, the much-awaited recovery in 2021 could come hand in hand with accelerating price inflation, and CPI is expected to be around 3.5% this year.
In that case, PMÁP issued this year will pay 4.75% interest in 2022, while last year’s bonds will pay 4.9%.
As reported earlier, the stock of Premium Hungarian Government Security (PMÁP) declined by HUF 208.4 bn to HUF 2,310 bn last year as large volumes held by institutional investors expired. It should also be noted, however, that the inflation-linked instrument fared rather well in the last quarter of 2020 and its stock grew by more than HUF 40 bn each month since September, indicating that Hungarian households are attempting to hedge against higher inflation.
Superbond or inflation-linked bond?
The so called superbond, the Hungarian Government Security Plus (MÁP+) is more attractive than the inflation-linked premium bond if inflation remains below 3.7% over five years of its tenor.
It should be noted that the MÁP+ offers stepped interest and its yield will only come to an annualised 4.95% if the investor holds onto it for the full five years. Nominal interest is shown below: the MÁP+ offers annual interest of 3.5% for the first six months, paying 1.75% after half a year, then 2% after the second six months and successively higher rates each year after the first. Also, anyone taking out their money outside a 5-day window after each maturity date will have to pay a 25bp redeeming discount.
The 5-year PMÁP will pay the prorated interest of the 3.3% (last year’s inflation) plus 1.25% (interest premium) in July. Assuming inflation is indeed 3.5% this year, it will pay 4.75% interest next year.
This means that in 2022, the MÁP+ will still offer higher interest than inflation-linked bonds issued this year, but investors who fear inflation will rise could consider buying premium bonds in addition to the MÁP+.
The conditions for redeeming PMÁP securities are less favourable than in the case of the superbond, as the state treasury only pays 99% of face value when redeeming early, effectively decreasing interest by 1%, while banks dealing in these securities may offer even worse rates. Meanwhile, the MÁP+ pays 99.75% outside the 5-day window after each maturity date. This means it is worth holding onto PMÁP until expiration.
It should also be noted that in addition to the PMÁP, Baby Bonds are also linked to inflation, with the interest premium offering an attractive 3% real yield. With its interest base is set similarly to the premium bond, the baby bond pays 6.3% interest this year, far above all other retail government securities.
Cover photo: Getty Images
