Hungarian bond yields tumbled and the forint rose on September 19 following the surprise upgrade of the sovereign by Standard & Poor’s after the market closed the previous Friday.
While S&P handed Hungary a second investment grade at the major ratings agencies, which is required by many institutional investors to buy sovereign bonds, the rally is not thought likely to last long. While S&P’s move was unexpected in its timing, the markets have been betting Hungary would earn a second escape from junk for some time. Certainly that will be the hope of the central bank, which will have its eye back on currency appreciation ahead of a rate-setting meeting on September 20.
Joining Fitch, which upgraded Hungary in May, S&P said the upgrade to BBB- is based on the country’s improving fiscal position, reduced external risk and strong growth expectations. Analysts and investors have been noting those improvements for over a year now. Meanwhile, it appears S&P now disregards suggestions from Budapest that it will relax its efforts to reduce the deficit next year due to concern over slowing growth.
The government will have enjoyed the reaction thus far. Hungarian Eurobonds extended their biggest rally in more than two years, with yields dipping 12bp to a record 2.92% by mid-afternoon, according to Bloomberg. That is below the Polish benchmark; Hungarian yields enjoyed a positive spread to its Visegrad peer for the first time earlier this year following S&P’s downgrade of CEE’s biggest economy in January. Still, the agency rates Poland two notches above Hungary at A-.
However, analysts are split on how long the run could last. The “upgrade is definitely positive for Hungarian government bonds as it means that many (investment grade oriented) funds will now be able to buy these Hungarian assets,” they suggest at KBC. However, others insist the upgrade is well priced in, a similar situation to that seen ahead of the Fitch upgrade. OTP suggested to bne IntelliNews earlier this year that while the market will be opened up to more risk-adverse investors, those keener to hunt yield are likely to cash in.
The forint, meanwhile, appreciated to HUF307.9 to the euro, its highest in more than six months. Analysts suggest the currency could push onwards to HUF300, which could crease brows at the Magyar Nemzeti Bank. Rate setters have pledged to hold the benchmark interest rate at 0.9%. However, after months of relative peace, they will now be closely watching the currency once more, as was the case early in the year. The MNB only commented that it welcomes the decision of S&P and that it will continuously work on with fiscal and monetary assets to reach more upgrades.
The BUX also joined the party. The benchmark index on the sleepy Budapest bourse launched its day by leaping to a nine-year high at the start of the day and finished it with a gain of 1.66%.
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