Investment funds significantly increase their holdings of government bonds over the summer

As if nothing happened

In many ways, the introduction of the social contribution tax in July set records for household savings in the month before it was introduced, but then in July everything seems to have gone back to normal.

In June, HUF 278 billion flowed out of bank deposits, while investment funds were the clear winners of the big savings boom, attracting HUF 326 billion in fresh savings. After investment funds, the second most popular asset class among households in June was government securities, which attracted HUF 281 billion in fresh capital.

After all this, the market for household savings calmed down considerably in July:

although capital outflows from bank deposits continued, in July households withdrew "only" HUF 154 billion, which is similar to the level of capital outflows seen in other months this year.

With investment funds having raised HUF 145 billion in July, and not much more than HUF 160 billion in government bond sales,

it seems that the boost in demand from the social contribution tax had disappeared by July.

Bank deposits stood at HUF 11.777 billion at the end of July, down HUF 70 billion from the previous month. Although transactions show a shortfall of EUR 150 billion, this is not so blatant given that similar capital outflows were seen in bank deposits in the other months of the year (the only exception was June, where the higher outflow was due to the impact of the social contribution tax).

The question is, of course, what the banks' mandatory information letter - which essentially promotes government securities - will do to bank deposits, which the government expects will encourage people to choose government securities for their savings:

Demand for investment funds also rebounded in July, attracting HUF 145 billion of fresh capital.

Among them, however, bond funds remain the most popular among the population, with HUF 2,842 billion in savings in this category last month, followed by mixed funds with HUF 1,612 billion and real estate funds with HUF 1,211 billion.

In July, government securities again attracted the largest amount of household savings, with more than HUF 160 billion flowing into the sector in a month, bringing the total amount of government securities in the hands of households to more than HUF 11.755 billion.

Meanwhile, the structure of government securities seems to be changing, as the stock of government securities held by Hungarians fell more significantly in July, from HUF 1,244 billion at the end of June to HUF 1,184 billion at the end of July.

We could well see a downward trend here in the coming months, as the era of discount Treasury yields of around 13% has come to an end, with the latest data showing yield levels now down to around 9%.

Government's calculation has worked in some areas

The fact that we have seen such a significant fall in yields on discount Treasury bills in recent months is no coincidence. On the one hand, as inflation has fallen, the central bank has been steadily reducing the benchmark rate, which obviously has an impact on short yields. On the other hand, investment funds have also generated stronger demand in the discount T-bill and government bond markets in recent times, due to the mandatory government holdings of government bonds.

The government has taken the following measures to channel investment funds into the government bond market:

• From 1 July, the assets held in the portfolio of securities funds, including only bond funds, equity funds and mixed funds, must be at least 60% securities (not, for example, bank deposits, as was the case for some funds).
• Also from 1 July, securities funds and real estate funds will have to hold at least 20% of their liquid assets in discount Treasury bills issued by the Hungarian state (this does not apply to funds investing at least 80% in foreign assets).
• From 1 August, the government also requires investment funds to hold at least 95% of their bond investments in HUF government securities (with some exceptions).

What is certain is that the impact of the mandatory government bond holding requirements for some securities funds is already visible in investment funds:

while in May the funds held HUF 1,350 billion of government bonds, by the end of July this had jumped to HUF 1,784 billion, an increase of more than 32% in two months. So it seems that the government's intention to attract an extra HUF 500 billion from the fund management market to the government bond market is indeed being realised.

The requirement to hold government securities will also come into sharper focus for banks later, but here the buying of government securities does not seem to have taken off in a major way yet.

As a reminder, Minister of Economic Development Márton Nagy said at a background briefing on this issue that the move could create additional demand of around HUF 1,800 billion from institutions in the government bond market. Of this, HUF 500 billion could come from investment funds, and HUF 1,300 billion of additional demand for long government bonds from the banking sector as a result of the change in the extra profit tax.

Foreign countries remain the largest creditor of the state

Statistics also show that foreigners held the most government debt in July, accounting for nearly 30% of the total, while the share of government debt held by Hungarian residents was close to 28%, the second highest share by ownership.

Among the main holders, the share of government bonds held by credit institutions is 23.2%, and this is likely to rise in the future as tighter government bond requirements apply to banks.

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