Drop of Hungarian yields below Poland's likely short-lived as MNB mulls halt to rate swap tenders

By bne IntelliNews April 15, 2016

The Magyar Nemzeti Bank is likely to review its use of interest rate swap (IRS) tenders, the deputy governor of the central bank said on April 15. Analysts suggest that could interrupt the fall in Hungarian bond yields, which dropped below their Polish equivalent for the first time this century the previous day.

The likely halt of the tenders, which have been used to support forint-denominated debt by local banks, comes as the MNB's "overhaul of its monetary policy toolkit has reached its goals," Deputy Governor Marton Nagy said in an article published on portfolio.hu. The ratio of external debt in the total state burden fell to 30% by the end of March, due to the shift towards forint-denominated debt financing, he added.

The MNB launched it’s self-financing programme in 2014. It has worked hard to reduce Hungary’s vulnerability by improving the currency composition of government debt. However, the country continues to struggle to reduce overall debt levels, which remain elevated at 75%-85% of GDP.

The overhaul of the policy toolkit will be completed in April, with the phase out of the central bank's two-week deposit facility for banks, Nagy writes. Therefore, the efficiency of the IRS facility will decrease he adds.

"All this justifies a strategic review of the programme and its role in the future, particularly with regard to the further necessity of the central bank's IRS facility," the article reads.

Amid eased Hungarian monetary policy and hopes that the country might escape junk status this year, yields on forint-denominated bonds maturing in 2027 dropped below those equivalent on Polish notes on April 14, for the first time this century. However, If IRS tenders are curtailed or suspended, that “might also speak against a persistently negative HU-PL yield in the future in our view,’ Erste analysts suggest.

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