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Hungary borrows at lowest yield in 15 months on budget pledge

Hungary borrowed at the lowest rate in 15 months as a pledge by Prime Minister Ferenc Gyurcsány to cut spending lured investors to a sale of 15-year government bonds.

The yield on the country's benchmark debt has slumped 1.2 percentage points since Gyurcsány said in June he would cut the budget deficit, the largest in the European Union as a share of national income. Standard & Poor's raised Hungary's credit rating outlook to stable from negative by on December 21 because of efforts by the government to reduce its funding shortfall. The country's bonds are still the highest yielding in the EU. The debt management agency today sold Ft 25 billion ($129 million) of 15-year bonds at an average yield of 6.39%, the lowest since October 2005. The rate is about 2.4 percentage points higher than the 4% investors earn on comparable German government bonds. „The rally is due to increased exposure by foreign investors to Hungarian bonds,” said Luis Costa, an emerging market debt strategist at ING Bank NV in London. „The budget has performed quite in line with the government forecast recently and should continue to perform well.”

Accelerating inflation prompted the central bank to raise key interest rates five times in 2006. Prices rose 6.4% in November from a year earlier, compared with 6.3% the prior month. The rate is the highest of the 27 countries in the EU. The yield on 15-year Hungarian bonds dropped below the rate on three-year notes in February 2006, signaling confidence among traders that policy makers will contain inflation. Three-year debt is more sensitive to changes in interest rates, while longer-dated securities typically reflect inflation expectations. Hungary's local-currency long-term debt earns a rating of A2 from Moody's Investors Service, five steps below the highest investment grade, and A- at S&P, six levels from the top. The change in S&P's outlook in December indicates the company is less inclined to cut its assessment for the country. Hungary's debt agency also sold Ft 75 billion in three-year bonds today at anaverage yield of 7.37%. (Bloomberg)