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Barclays recommends Hungarian bonds on budget - extended

Hungarian bonds will probably extend gains, bolstered by investor confidence in the government's measures to cut the European Union's largest budget deficit, according to Barclays Capital.

Hungary's debt in the past month has returned 1.5%, the most among 26 investment-grade bond markets around the world, data from New York-based JPMorgan Chase & Co. show. The government aims to lower the deficit, which may top 10% of economic output this year, by Ft 2.35 trillion ($11.8 billion) through 2008 by raising taxes and cutting energy and drug subsidies. “The numbers buying into Hungary's austerity program have grown,” wrote Barclays emerging-market strategists Matthew Vogel and Koon Chow in a note to clients. The effects of the government's fiscal measures “may be stronger than we had previously thought.”

International investors increased their holdings of Hungary's local-currency debt to a record Ft 2.92 trillion from Ft 2.68 trillion at the end of September, said the Debt Management Agency. The forint has been the best-performing currency in the past three months, gaining 7.5% against the euro and 9% versus the dollar, according to data compiled by Bloomberg. The premium investors demand to hold Hungary's 10-year debt over similar-maturity German bunds has narrowed to 311 basis points, or 3.11% points, from a two-year high of 410 basis points on Oct. 4. “The narrowing in the perceived risk premium in Hungary could have further to go,” Vogel and Chow wrote in the research note, released November 17.

Hungarian bonds fell in September after revelations that Prime Minister Ferenc Gyurcsány lied about the economy to win April's national election sparked off the worst riots since the failed 1956 revolution. Demonstrators demanded the premier's resignation. Bonds gained after Gyurcsány won a confidence vote in parliament October 6, giving him a mandate to pursue his fiscal program. The yield on the 5.5% bond due in February 2016 has fallen 86 basis points to 7% since that vote. “There seems to be little rebellion within the Socialist Party, and the momentum for the opposition looks very much lost,” said Vogel and Chow. “The anti-government protests remain low key. That leaves the austerity measures largely unchallenged, as has been reflected by the relative ease with which the premier has pushed through the fiscal measures thus far,” they wrote. A pickup in inflation because of higher value-added tax rates, further central bank interest-rate increases, lower energy-price subsidies and potential declines in the forint pose a risk to Hungary's fixed-income market, according to Barclays. Those risks remain limited in the longer term partly because the fiscal measures will crimp consumer spending, Barclays said. The central bank will probably raise its main rate a quarter-percentage point to 8.25% and start reducing the cost of borrowing in the second half of next year as spending cuts take effect, Barclays said. (Bloomberg)