Turnaround in the government bond market, it is no longer worth buying retail government securities


Market government bonds have higher yields, with bonds previously termed “super-government securities” losing their competitive advantage.

The cycle of raising the interest rate of the Magyar Nemzeti Bank is beginning to mature, although it is not yet over. As a result of the rise in key rates – and, of course, the drastic slowdown in inflation – three- and five-year market-rate government bonds have been quoted at seven per cent in recent days.

This means that in one year, yields rose 5.7 percent and 5.3 percent, respectively. In other words, in a year there has been a radical turn in the financing of public debt, its costs have multiplied, and this means an additional expenditure of hundreds of billions of forints a year for the state. The sharp rise in market government bond yields has also resulted in bonds previously dubbed “super-government securities” losing their competitive advantage.

In the mid-2010s, the government shifted its focus on financing public debt, with the goal being that the Hungarian population increasingly financed public debt instead of domestic – but mainly foreign – institutional investors, ie banks and investment hats. The government assumed that while the first step was taken by foreign professional investment funds at the outbreak of the previous financial and economic crises, they had withdrawn capital from Hungary, making it very difficult to finance public debt. In contrast, the Hungarian population is a much more stable investor because it does not escape its money from government bonds during a crisis. At the same time, international and Hungarian government bond yields were extremely low in the mid-2010s, and new retail government bonds, the Hungarian Government Securities (MÁP) Plus, were invented to boost purchases.

MÁP Plusz is a band-rate paper that provided an average return of around 5 percent for the entire five-year term, which was 1-3 percent above inflation when it was introduced in 2019, so the paper paid a fair real return. However, due to rising inflation, Premium Hungarian Government Securities (PMÁP) has become more and more attractive, with the government debt manager selling the last series at 6.6 percent, which means a heavy loss with the expected inflation of 8.5-10 percent this year. The PMÁP inflation-tracking paper pays an additional 1.5 percent compared to the previous year’s money deterioration, which means that its yield may be as high as 10 percent (above) next year, which may be attractive.

However, the real turnaround has been in normal market bonds: in recent days, 3- and 5-year debt securities have already been bought at yields above 7 percent. Although the seven percent yield is still a loss for the bondholder this year, assuming declining inflation, they will pay higher and higher real yields on the securities in the coming years, so it may be more and more worth considering buying them. The key is how quickly inflation in Hungary can fall, but analysts are extremely divided on this issue. According to the latest IMF forecast, annual inflation in Hungary could reach 10.3 percent in 2022, and this is the highest known forecast today. The MNB expects money to deteriorate by 7.5-9.8 per cent this year and by 3.3-5.5 per cent by 2023. According to IMF experts, the increase in prices will be at least 6.4 percent in 2023, which means that seeing only these two forecasts, the uncertainty is huge, but it can be deduced that next year, with inflation falling close to 5-6 percent, a also a government bond, which can be purchased at the Hungarian State Treasury with a yield of 6.5 or 7 percent.

According to the data published on the ÁKK website, government securities with a maturity of 10, 15 and 20 years can be purchased with an annual yield of around 6.7-6.5 per cent. In the case of a twenty-year bond, 9-10 percent inflation will still cause a heavy loss this year, but next year the investor can keep his money, but the paper can pay a fair real return in the remaining 17-18 years, assuming a 1-2 percent inflation in the long run. falls into the band. There have been examples of such low inflation in the last decade, not to mention the fact that the introduction of the euro, which would be the most serious inflation-anchoring measure, is likely to take place in Hungary in the next 5-10 years.


Source: Népszava by nepszava.hu.

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