Hungarian bonds head for third weekly decline on rate outlook

Hungarian government bonds are set to drop for a third week, their longest losing run in almost three months, amid speculation the central bank will have to raise interest rates to fight inflation and curb the forint's decline. Standard & Poor's cut the nation's credit rating on June 15, citing a burgeoning budget deficit and rising debt, pushing bond yields to the highest in 2 1/2 years. The central bank raised its key rate a quarter point to 6.25% this week saying a government plan to narrow the budget gap will double inflation next year. The rise in rate didn't keep the forint from falling to a record low.

“The central bank missed the opportunity to take a braver step when it hiked only a shy 25 basis points,'' said Gyula Tóth, an economist at Bank Austria Creditanstalt in Vienna.  “We see a fair risk the bank will have to call an extraordinary meeting over the coming weeks,'' to raise rates. The yield on Hungary's benchmark 5.5% bond due February 2016 rose 11 basis point this week to 7.61%, at 10:30 a.m. in Budapest. Its price, which moves inversely to its yield fell 0.65, or Ft 65 per Ft 10,000 face amount, to 85.91. The yield has gained 70 basis points in the past three weeks. The forint slid to a record low of 280.20 per euro today, and was at 279.60 by 11:15 a.m. in Budapest, from 278.11 yesterday, and 273.83 on June 16. The currency set a record low every day this week. The forint is falling with other currencies in emerging markets on concerns the Federal Reserve, the European Central Bank and the Bank of Japan will lift interest rates prompting investors to pull out of lower rated emerging markets. The forint was the fourth-worst performer this week among 62 currencies worldwide tracked by Bloomberg. Only the South African rand, the Turkish lira and the Romanian lei fell more.

The Budapest-based central bank's 13 policy makers, led by President Zsigmond Járai, raised the deposit rate from 6% to 6.25%, the first increase in 2 1/2 years at a policy meeting June 19. Inflation will “significantly'' exceed the central bank's 3% target next year and may be above that in 2008, the council said. S&P cut the nation's credit rating last week one step to BBB+ from A-, the third-lowest investment grade. The outlook is negative, signaling further reductions may follow. Prime Minister Ferenc Gyurcsány's government, which won a second term at April's election, has missed deficit goals for the past five years. While pledging to cut the gap by Ft 2.35 trillion ($11 billion) through 2008, it raised the 2006 gap forecast last week to nearly three times the limit needed for adopting the euro. The government almost doubled the 2006 deficit forecast to 8% of gross domestic product. The measures for cutting the deficit include eliminating government jobs, raising taxes, introducing new levies, and increasing energy prices. S&P said the plan focuses too much on raising revenue rather than spending cuts and overhauling the structure of public finances.