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Hungarian debt held by overseas investors rises to record

Hungary’s debt management agency ÁKK said international investors held HUF 3.51 trillion ($18.6 billion) in government bonds and bills as of June 26, compared with HUF 2.61 trillion at the end of 2010, the highest share on record, Bloomberg reported.

As Péter Vizkelety, an economist at Assicurazioni Generali SpA's unit in Budapest, explains, foreign investors have been lured to the Hungarian bond market by high nominal interest rates and confidence that the government will reduce its budget deficit.

The yield on Hungary's 10-year bonds is 157 basis points (1.57%), higher than for Polish bonds of the same maturity, the widest spread since January.

At the beginning of the year, Prime Minister Viktor Orbán said he would cut welfare spending to prevent the budget from unraveling after the government loses the benefit of one-time industry taxes and a diversion of funds from private pension arrangements to government coffers.

Government bonds maturing in 2022 rallied, pushing the yield two basis points (0.02%), lower to 7.386% as of 1:46 p.m. in Budapest, after reaching a three- month high of 7.476% at the end of last week. The forint appreciated 0.4% to 269.74 per euro.

Hungary this month acquired HUF 2.95 trillion in assets from privately managed pension funds, including HUF 1.35 trillion in Treasury bonds and bills, which have been withdrawn to reduce public debt.

Foreign investors will be "more cautious in coming months" as their share of the bond market rises because of the pension changes, Vizkelety said.

The peak in foreign ownership "contains risks, especially because as the bonds taken over from private pension funds are canceled, the percentage of foreign ownership rises substantially," Gyula Tóth, a strategist at UniCredit SpA in Vienna said. "Foreigners may pull out their investments in a potential market slump faster than domestic buyers," she added.

The Cabinet aims to save HUF 550 billion next year and HUF 900 billion annually by 2013 through welfare-spending reductions, Economy Minister György Matolcsy announced to reporters in March.