Equity 4 May 2021, 9:00am

Hungarians turn towards retail security with highest yield

Portfolio

Hungarians have more than HUF 120 billion invested in baby bonds, and although demand for the instrument has not been very high in recent years, something has apparently changed in the past six months. Baby bonds are the retail government securities with the highest interest rate, currently 6.3%, and they offer a good investment as inflation is expected to increase and the yields are tied to inflation.

More than HUF 120 bn

As of the end of March, baby bonds totalled slightly more than HUF 120 bn. As shown below, the instrument was attracting increasing investments until June 2019 when the Hungarian Government Security Plus (MÁP+) debuted and rearranged the market.

In the past six months, however, net investments were above HUF 10 bn each quarter, which means the baby bond attracted as much money as it usually does in a year.

Over the past 12 months, the stock of baby bonds grew nearly 37%, or more than HUF 32 bn, as the pandemic apparently stoked demand. For comparison, the increase was less than HUF 25 bn in 2019, although it represented a higher growth ratio (45%).

Relatives are collecting money in baby bonds for 241,000 children, András Tállai, state secretary at the Finance Ministry, said in February. This means there is ample room for growth as the treasury’s registry shows that about 1 million children born after 31 December 2005 have no Start account for baby bonds.

Why is it worth buying?

There is currently no government security in Hungary that offers a higher real yield: it has a 3% premium above the previous year’s inflation, which comes to 6.3% annual interest at present. The only drawback of the baby bond is that it must be held until the child turns 18, and even then only the given child can dispose over the amount.

A calculator on babakotveny.hu helps find out how much savings are possible based on the birth date, the date of opening the account and the monthly payment.

Calculating with 3% inflation each year and assuming the parents of a child born in recent days have already opened a Start account, the amount due on the child’s 18th birthday depending on the monthly payments are as follows:

Conditions of the baby bond

Key information regarding the security:

It matures 19 years after the day of issue.
It has a base face value of HUF 1, so there is no lower limit.
It is a variable-interest bond, with annual interest equal to the interest base and the interest premium (the latter is fixed at 3%).
Base interest is equal to the inflation (CPI) as published by the Central Statistical Office (KSH) for the previous calendar year. s a result, the bond currently pays 6.3% annual interest.
Interest is credited to the Start account on 1 February each year (2 December for the first series, 2032/S).
A subsidy equal to 10% of annual investment is also offered, capped at HUF 6,000, and the baby bonds come with a HUF 42,500 “life-starting grant”.
Once a Start account is opened, buying baby bonds is automatic using the funds paid into the account.

It should be noted that the HUF 42,500 initial grant is placed on a deposit account at the State Treasury with interest equal to inflation, and the amount is only transferred to baby bonds once the parents of the child open a Start account at the treasury or online.