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Hungarian bonds gain most in Europe as budget cuts cause riots

Hungarian bonds posted the biggest gains in Europe since Prime Minister Ferenc Gyurcsány announced plans to cut the budget deficit and sparked the worst riots since the failed 1956 revolution.

The debt returned 3.2% after Gyurcsány survived an October 6 confidence vote in parliament over his proposals to reduce the biggest fiscal deficit in the European Union, according to an index compiled by JP Morgan Chase & Co. “We have increased our positions in Hungary and we're buying,” said Simon Lue-Fong, who helps manage $1.4 billion as head of emerging-market debt at Pictet Asset Management in London. “Fiscal policy has been surprising.” The yield on 5.5% bond due in February 2016 has fallen 59 basis points to 7.24% since the prime minister won approval to cut public spending.

The government predicts the deficit will reach 10% of GDP this year. Italy, by comparison, projects a gap of about 4.8% and Germany a shortfall of 2.6%. The premium investors demand to hold Hungary's 10-year debt over similar-maturity German bunds has narrowed to 3.39% points from a two-year high of 4.10% points on October 4. Magyar Nemzeti Bank, Hungary's national bank, increased the benchmark two-week deposit rate on October 24 to 8%, the most in the European Union, to quell inflation. Central bank President Zsigmond Járai raised benchmark rates five times since June to restrain consumer price growth, which reached a two-year high of 5.9% in September. (Bloomberg)