Compiled by Holger Kron
Deutsche Bank, Frankfurt
Tel: +49 69 9103 4468
Despite worries about the currency, the FRA curve continues to price in around 100bp in cuts for the remainder of the year.
The bond market proved robust this week, demand in the T-bill auctions has been promising and even long term government bonds experienced some bottom fishing. Basically every time the forint pushes towards Huf260/Eu the market reacts with bottom fishing, indicating investor confidence has improved.
The bond markets, however are uncertain about the final shape of the budget. This week's revision of this year's budget indicated another increase of the deficit, which will exceed 4.8% of GDP - again above the 4.5% target. Additionally there is market concern over the 2004 budget plan too, especially after the Hungarian Socialist Party, the largest coalition partner, criticised the planned cancellation of tax concessions.
Thursday's announcement of next week's government bond auction caused little surprise. The AKK will auction Huf70bn in total, Huf40bn in 2008Cs and Huf30bn in 2014Cs, which is well within market consensus expectations. There is also a continuing bid for forint Eurobonds, which results in regular taps in outstanding issues, as per the EIB 7-1/8% 2005 this week.
Given persistent retail demand it is likely that we will see further forint Eurobonds being issued. However, the local Hungarian fixed income market might have to struggle some time with its high yields, especially as woes of international bond markets add to domestic problems.
Nevertheless, currently high yields and a relatively cheap currency deliver an attractive diversification for internationally invested portfolios.