Some hedge funds have begun quietly increasing their bets against Hungarian sovereign bonds in the belief that the yields don't properly reflect the country's political and economic outlook, Reuters said. The amount of Hungarian sovereign bonds out on loan - an indicator of short-selling by funds anticipating a drop in price - has risen sharply in recent weeks, data shows, while short interest in some other leading east European economies has fallen. Economics and politics are informing these hedge funds' thinking on Hungary, central Europe's most indebted nation on the basis of its public debt of around 79 percent of GDP. Hungary's economy shrank 2.7 percent year-on-year in the fourth quarter. Many of its firms and citizens are shackled with costly foreign currency loans. Changes to Hungary's constitution have drawn criticism from the European Union, United States and human rights groups, who say Prime Minister Viktor Orbán is undermining democracy - an accusation the government denies. Orban has also been criticised for appointing a close associate as governor of the central bank. Some hedge fund managers think yields on Hungarian sovereigns are too low - the 15-year yield for instance stood at 6.8 percent on Wednesday, below 7.5 percent for emerging market peers Russia or South Africa. The managers believe such yields don't fully reflect the economic and political fundamentals in Hungary. And as Cyprus's €10 billion bailout reignites fears over Europe's debt burden, some hedge funds are betting the investors who rushed into Hungary bonds last year are overlooking a number of negative factors. "I still don't understand why bond yields are trading so tight (low), given the current situation," said Steven Mitra, partner and senior portfolio manager at hedge fund firm LNG Capital, who last week put on a "short" position on Hungarian sovereign bonds, betting on a price fall. "The 2018 and 2020 bonds, yielding 4.5 to 5 percent, are the sweet spot to short. It's a very cheap short to put on given the current risk profile of the country."