MNI INTERVIEW: Hungary Eyes Samurai, Panda Sales -- Debt Chief

Hungary’s debt management agency will sell Japanese and Chinese currency bonds worth up to EUR500 million later this year, but is unlikely to add to planned benchmark euro or dollar issuance for the moment as it leaves room for any shortfall in future domestic demand, its head Zoltan Kurali told MNI.

The AKK enjoyed “stellar” retail bond sales in 2023, Kurali said, as the EU released more than EUR10 billion in funds, mitigating foreign investors’ concerns. But the expiration next year of a Covid-era central bank lending facility could drain liquidity worth around 3.5% of GDP from the Hungarian banking system in 2025 and 2026, he said in an interview.

“This is one of the things that we are currently preparing for in terms of future auctions and creating headroom and optionality for us, if local markets will struggle to absorb our supply and the effects of QT at the same time,” he said, adding that there are comparatively few FX bonds coming to maturity this year. “We don't really think we will do benchmark sized public dollar or euro issuance. We may do some Asian deals and maybe some private placements if pricing and the investors interested fit our diversification objectives."

POSITIVE SPREAD

Still, local bank demand may be fuelled by the rise in asset swaps, taking forint bond yields above swap rates after a two-year period during which the the spread was negative, Kurali said.

“As a result of this negative spread local banks didn't buy a lot of bonds in the last few years, since QE. We expect the spread to remain positive, and that local banks are going to come back to the market. That is a very important anchor for the market,” he said. ”The effects of QT aren’t black and white, because the banking system's liquidity has improved a lot. Maybe 3.5% of GDP over two years is not going to have that huge of an impact. But we have to be prepared.”

Last year, market expectations for big Fed and ECB interest rate cuts and fading fears over the impact of the war in Ukraine, led investors to seek better yields in riskier sovereign markets, though Kurali noted that the outlook has since changed.

“I can only imagine a maximum of three cuts of 25 basis points for both the Fed and the ECB this year, though of course it will depend on economic and inflation developments.” (See MNI MNB WATCH: 100BP Cut Ups Pace Of Hungarian Easing)

After previous Samurai and Panda deals worth the equivalent of EUR300-500 million and EUR150-200 million, the AKK is currently allocating around EUR500 million for Asia in 2024, Kurali said.

“We might start in Japan and only then do China - we will see. We have around 500 million euros earmarked for Asia as a whole for 2024, and we will probably start mandating banks in the spring,” he said.

CENTRAL BANK

For the AKK, recent reports of tension between the National Bank of Hungary and the Hungarian government are not helpful, Kurali said, though he expressed caution as to their ultimate impact.

“The question is always, ‘Does this event, or do similar events have a direct impact on the market or not?’ In this case it’s hard to tell, because global rates have been rising for a couple of days and spreads have been widening. At the same time the currency volatility has an effect on local yields,” he said.

Under his watch the AKK has avoided “typical EM crisis trades,” such as illiquid loan products, Kurali said.

“We are working within a highly institutionalised and rules-based debt management framework, with diversification across debt instrument types, currencies, investor characteristics and geographies. It’s a very risk management focused approach and it works.”