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Forint rises to eight-month high on demand for Hungarian bonds

Hungary's forint advanced to its highest in more than eight months as investors bought forint- denominated debt, the highest-yielding in the European Union.

The forint climbed for a second day as foreign holdings of Hungarian bonds surged to a record high of Ft 2.92 trillion ($14.5 billion) yesterday after the country's central bank kept its benchmark interest rate on hold at 8%. “The central bank's decision to leave rates unchanged triggered a rally for Hungarian bonds, which supported the forint,” said Martin Blum, head of emerging-market strategy at Bank Austria Creditanstalt AG. “In coming weeks the forint can remain on a relatively firm footing.” Against the euro, the forint rose to 255.64, its strongest since March 8, and was at 255.83 at 10:20 a.m. in Budapest from 257.08 yesterday. It may gain to 255 by the end of the year, Blum said. Hungary's benchmark 5.5% bond due in February 2016 soared this week, pushing the yield down 23 basis points to 6.87%, its lowest since early June.

The yield advantage offered by Hungarian debt securities is prompting foreign investors to buy forint-denominated bonds. The yield difference, or spread, investors demand to hold Hungarian 10-year debt rather than similar-maturity German bunds is 318 basis points, compared with 299 basis points six months ago. Hungary's central bank yesterday lowered its inflation forecast from its estimate made in August estimate. The bank now expects an average inflation rate of 6.9% in 2007 and 4.1% in 2008, compared with 7% and 4.2% in the previous forecast. A stronger currency eases concern inflation will accelerate. The forint has risen 3.3% against the euro in the past six months. (Bloomberg)