Is the inflation-tracking government bond really a Hungarian speciality?

Inflation-tracking government bonds soar in Hungary

Around the world, there are many countries that issue government bonds specifically for their citizens, and

in Europe, apart from Hungary, these include Malta, Portugal, Ireland, Italy, the UK and Poland.

At the end of June,

the Hungarian population held the largest share of public debt in the EU, at over 21%:

But it is not only in Europe that dedicated retail government bond schemes exist, there are also such schemes in Bangladesh, India, Brazil, Japan, Indonesia and the US.

In Hungary, not surprisingly, inflation-tracking government bonds are the most sought-after retail securities, as high inflation has led many people to seek this form of protection for their savings. At the end of June, the public had nearly HUF 6,000 billion in savings in Premium Hungarian Government Bonds (PMÁP), representing around 65% of the total stock of government securities held by the public.

Poor supply of inflation-tracking retail securities in the world

Bár az infláció már több országban is enyhül, és kevés olyan ország volt, ahol a magyarénál jelentősebb drágulást lehetett volna megfigyelni, sok helyen okozott fejtörést többek között a megtakarítások reálértékének megőrzése miatt is. Így utánanéztünk annak, mennyire magyar sajátosság az inflációkövető, dedikáltan a lakosságnak szóló állampapír megléte, hány olyan ország van a világon, ahol hasonló konstrukciók léteznek a lakosság számára.

Although inflation is already easing in many countries, and there have been few countries where inflation has risen more than in Hungary, it has caused headaches in many places, including in terms of preserving the real value of savings. So we looked at the extent to which the existence of inflation-tracking government bonds dedicated to the general public is specific to Hungary, and how many countries in the world have similar schemes for the general public.

Inflation-tracking government bonds are of course available in many countries, as they are popular not only with the general public but also with institutional clients, but it is surprising that, based on our own collection,

there are few countries where it is possible to buy dedicated government bonds for the general public that are indexed to inflation.

Based on our findings, the Czech Republic is one of the countries where people can buy inflation-linked government bonds. There, the maturity is 6 years and the interest rate depends on the inflation figures published by the Czech Statistical Office. The Czech market also offers very attractive interest rates, which have been above 15% per annum, but for the paper maturing in 2027, for example, it is just over 12.7% per annum between 2022 and July 2023.

In Europe, Italy is also notable for its retail inflation-tracking government bonds. BTP Italia pays interest to investors every six months, also indexed to inflation. First launched in 2012, the Italian inflation-linked government bond, issued this year, has a 5-year maturity and offers a premium above inflation (0.8%) if investors hold it until maturity in 2028. The interest rate basis of the scheme is therefore inflation-linked, but the paper offers a guaranteed euro yield of 2%. The coupon is paid every 6 months, with a minimum investment of €1,000.

Outside of Europe, inflation-tracking retail government bonds are still available in Hong Kong, the construction here is a 3-year paper with a fixed and floating leg, but there is a minimum interest rate of 2% below which the paper will not go. The interest is paid every 6 months, so the interest is basically the arithmetic average of the annual rate of change of the consumer price index. According to the Hong Kong government website, this retail scheme has been available since 2012, with the next interest payments due in December and June next year for the scheme expiring in 2024.

Also outside Europe, in the US, a government bond called I Bonds is offered to the general public as part of the savings government bond, which also has an inflation-linked interest rate. In this case, too, there is an interest rate base, which is the current rate of inflation, and a fixed interest rate, currently 0.9%. The current scheme thus offers an annual interest rate of 4.3%, denominated in dollars (interest is paid every 6 months). The I Bond has a 30-year term, and can of course be redeemed earlier, but there are conditions:

• the bond can be redeemed after a minimum holding period of 12 months, and
• if it is redeemed within 5 years, the interest for the last 3 months is lost.

The UK had a similar scheme to the US, but the inflation-linked savings certificate was phased out around 2010-2011. When it was available, it was available with 2, 3 and 5 year maturities. The interest was compounded by a premium for inflation (previously 1.35%, now down to around 0%). Some people still have the investment, of course, as the rule allowed those who had the savings pass to renew it, but it is no longer available to new buyers.

A wider choice (was) available in Hungary

Overall, it can be noted that Hungary has one of the widest product ranges, including a broad range of retail government bonds and inflation-linked government bonds.

In Hungary, as mentioned above, the Premium Hungarian Government Bond is the most popular retail instrument, and is also inflation-tracking. Its main parameters are:

• dematerialised, inflation-indexed, variable-rate government bond,
• the denomination of the series issued on and after 30 September 2022 is HUF 1, while the previous series were issued in HUF 1,000 denominations.
• The interest rate payable (except for some series) is the sum of the interest rate base and the interest rate premium. The interest base is the annual average inflation rate and the interest premium is currently 0.25%, so the new series currently carries an interest rate of 14.75%.

Also an inflation-tracking government bond, and not least the highest paying retail government bond, is the Baby Bond, the main parameters of which are:

• The maturity is 19 years from the date of issue.
• The base price is HUF 1, so it can be bought for any small amount.
• Variable rate government bond, the annual interest rate is equal to the sum of the interest rate base plus the interest rate premium (the interest rate premium is 3%).
• The interest rate base is equal to the annual average inflation rate (consumer price index) as published by the Hungarian Central Statistical Office (KSH) for the calendar year preceding the year in which the interest rate is set. On this basis, the instrument pays an annual interest rate of 17.5% from February.
• Interest is credited to the Start securities account on 1 February each year (2 December each year for the first series (2032/S)).
• A grant of 10% of the annual payments, up to a maximum of HUF 12,000, is also credited, and the Baby Bond is accompanied by a HUF 42,500 start-up grant.
• Once the account is opened, the purchase of Baby Bonds is automatically made from the funds credited to the Start Securities account.

It is worth noting that the HUF 42,500 start-of-life allowance is deposited in an escrow account with the Hungarian State Treasury, with interest at the rate of inflation. In order for this initial amount to be placed in an account in the child's name and to earn interest there in the form of a Baby Bond, a Start Securities Account must be opened at the Hungarian State Treasury or online through our client portal.

There was previously a euro inflation-tracking government bond in Hungary, the Premium Euro Hungarian Government Bond, which paid a premium over eurozone inflation. However, the scheme was scrapped by the Government Debt Management Agency (ÁKK) in March this year, so if someone wanted to buy a euro-denominated government bond, they could buy the Euro Hungarian Government Bond, which also has a variable interest rate, but the interest rate is based on the 3-month EURIBOR.

Cover photo: Getty Images