Growing demand and supply in the government bond market

Gábor Orbán
macroeconomic analyst and bond portfolio manager

On 2 July the State Debt Management Centre (ÁKK) sold HUF 41.5 billion in 3, 5 and 10-year government bonds at single-digit yields. Encouraged by the success of this auction the ÁKK decided to raise the quantity on offer, and two weeks later sold another HUF 85 billion’s worth at even lower yields. Following this, investors also bought a billion euros’ worth of five-year FX bonds from the Hungarian state. The oversubscription of the forint securities by a factor of 2.5-3, coupled with the marked reduction in yields, points to considerable demand potential. In terms of the quantities sold, if lots of this size were “snapped up” every two weeks, we wouldn’t be so far off the issued volumes of the last precrisis year of 2007. If the sales continue with the most recently announced items (also taking into account the 40% non-competitive issue opportunity), an annual gross bond issue of over HUF 2,000 billion is within reach, and there is a realistic chance that the state will be capable of financing itself without the need to draw down any more IMF funds. (This, of course, does not necessarily mean another, smaller standby loan won’t be necessary at a later date, in order to perpetuate the credit already utilised).

With regard to the structure of the bond issues, events have taken a positive turn (the State Debt Management Centre is correctly making an effort to sell higher volumes at the shorter maturities); however there is still room for improvement, as investors in the MAX reference index need to buy three times as many three-year papers than ten-year ones (and twice as many five-year bonds than ten-year ones) in order to maintain their risk in line with that of the index. Besides this, it is also in the best interests of the state to avoid, as far as it can, continuing to rack up debt at the still-high forward interest rates of over 8%. Another important lesson of the recent period is that the country’s improving credit risk rating is both a cause and a consequence of the decline in distant forwards, and the flattening of the yield curve. Regardless of which came first in this chicken-and-egg scenario, it is now advisable to concentrate bond issues on the shorter maturities, which is precisely what all debt managers are doing, both locally and in the broader region.

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