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UPDATE - Foreign investors buy net €4.5bn worth Hungarian forint securities in 2011

Debt

Non-resident or foreign investors bought net HUF 1,264.1bn of forint-denominated Hungarian government securities in 2011, investing more than €4.5bn at last year’s average exchange rate, data from the State Debt Management Agency (AKK) show.

Last year’s net foreign investment in government securities was more than three times the HUF 377bn of net purchases in 2010.

The data published by AKK and the National Economy Ministry show foreign investors played a key role in budget financing last year.

They not only took up the equivalent of last year’s net deficit-financing issues of forint bonds and of discount T-bills, totalling HUF 707bn, but they bought a further net HUF 557bn worth of forint-denominated government papers on the secondary market in 2011.

The stock of government securities in foreign hands rose in the first nine months of 2011 to reach a record high of HUF 4,015bn on September 14 before slipping to HUF 3,796.8bn on December 30, 2011. Even with the drop, the year-end holdings were up by 50% from the end of 2010.

In a less favourable development, the average period remaining to maturity of the stock has shortened, to 4.13 years at the end of 2011 from 4.68 years at the end of 2010.

On December 31 HUF 3,482.7bn, or 91.7%, of the forint securities held by foreign investors were bonds and the remainder consisted of discount T-bills.

The downgrade of Hungary’s sovereign bonds into junk - first by Moody’s on November 24, then by Standard and Poor’s on December 21, and finally on January 6 by Fitch - had only limited effect on the foreign holdings, the figures show. The data confirm AKK’s December assessment that the downgrades had already been priced in by investors.

The foreign stock actually reached its low point at around HUF 3,760bn just before Christmas. The turnaround came in the first days of January, most likely affected by both a more conciliatory government tone regards the pre-conditions for EU-IMF loan talks as well as by yields in excess of 10%.

The foreign stock has risen since to fluctuate between HUF 3,800bn and HUF 3,900bn for most of January, and secondary market benchmark yields have fallen almost 200bp from the extremes reached early January.

Yields, especially bond yields, followed the developments in the stock held by foreign investors closely during the year. By late August or early September, the average bond auction yields dropped to their lowest level since March-April 2010 before rising to levels unseen since the late summer or early autumn of 2009.

The three-year auction yield fell almost 200 basis points from the December 2010 to 5.83% in early September before rising to average 8.31% at the last successful auction of the bonds in 2011. Five-year auction yields dropped nearly 140bp in nine months to 6.46% at the September 9 auction only to average at 9.63% on December 29. The ten-year auction yield fell less, by close to 70bp, to bottom out at 7.28% on August 31, but it rose to reach 9.70% on December 29.

Except for the 8.44% three-year average, the auction yields fell since the end of 2011, with the five-year yield at 8.64% and the ten-year yield dropping to 8.72% at the last auction on January 25. After a rise in the past two days, the respective secondary market benchmarks were higher - at 8.60%, 8.84% and 8.93% - on Monday.

The increases in the foreign holdings of forint government securities in 2010 and 2011 more than made up for the drops in 2008 and 2009. The foreign-held stock fell HUF 782bn in 2008 when foreign investors reduced their holdings by almost HUF 900bn in the last three months of the year as the financial crisis hit Hungary. And it still declined HUF 303bn in 2009.

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