Hungary's Euro Adoption Roadmap Could Trigger Bond Rally, Debt Chief Says
Hungary's Fiscal Plans and Market Reactions
By Krisztina Than and Gergely Szakacs
BUDAPEST, Oct 1 (Reuters) - Hungary's bond yields could fall further if the government presents a credible fiscal plan that puts the country on course to adopt the euro, the head of debt agency AKK said, warning of a backlash if the roadmap disappoints investors.
Prime Minister Peter Magyar, who ousted Eurosceptic Viktor Orban in an April election, has pledged to meet the conditions of euro entry by 2030, including a big reduction in Hungary's budget deficit.
The promise has boosted the forint and triggered a substantial bond rally this year.
Market Confidence and Government Responsibility
"Both the government and the AKK know this is a very significant vote of confidence that the market has extended in advance," AKK Chief Executive Gergely Tardos told Reuters.
"Obviously, that brings responsibility: if they become disillusioned, the domestic yield curve would be in a very different place."
The government plans to announce the 2027 budget and a fiscal roadmap to euro adoption later this month.
Central Bank Measures and ERM-2 Entry
The central bank has lowered its inflation target to 2.5% from 3% as of 2028 and Deputy Governor Zoltan Kurali told Reuters that Hungary could join the Exchange Rate Mechanism (ERM-2), the waiting room for the euro, in early 2029 at the latest.
Euro Optimism and Yield Movements
EURO OPTIMISM
Even as global bond markets come under increasing pressure, BBB-rated Hungary's 10-year yields have fallen 170 basis points this year, dropping below equivalent levels in A-rated Poland, driven by hopes of a cut to a budget deficit that is set to exceed 7% this year.
Investor Expectations and Deficit Targets
Tardos said based on discussions with investors, a 2027 deficit target above 5.5% would be "a very clear disappointment", the 5% range would be market-neutral, while a shortfall of 4.5% or below would be a positive surprise.
"If next year's deficit target is low, underpinned by measures laying out how it will be achieved, and the market finds it credible, then yes, there could be another major wave of (bond) buying," he said.
In a favourable scenario, Hungary's long-term yields could fall to around 4% to 4.5% by the time Hungary joins the exchange rate mechanism, he said, from around 5.8% currently.
Once in ERM-2, Hungary could consider boosting the share of debt issued in a foreign currency, mostly euros in Hungary's case, Tardos said.
He added, however, that the gap between longer-dated forint and euro yields had already narrowed significantly, curbing the incentive for such borrowing.
No Rush with FX Bond Issuance
NO RUSH WITH FX BOND
Tardos said the AKK planned no major changes to its debt financing strategy next year, including a 30% limit on the share of foreign-currency denominated, or FX, borrowing.
Given higher FX maturities, international borrowing could be around €8 billion ($9.03 billion) next year, with the bulk coming from foreign-currency bonds and the rest from retail bonds or the European Union's Security Action for Europe, or SAFE, defence instrument, he said.
However, he added that the AKK was not planning to tap the market with an FX bond in the first days of 2027, as €9 billion in EU funds released in exchange for rolling back Orban's anti-democratic reforms would be received at the end of the year.
"Treasury liquidity will close this year at a fairly high level," he said.
Changing Investor Base and Market Volatility
Tardos also said a changing investor base has helped Hungary weather market volatility driven by the Iran war and surging bond yields globally.
New investors included those specialising in lower-yielding euro zone assets and others who used to invest in Hungary but have been on the sidelines in recent years.
($1 = 0.8863 euros)
(Reporting by Krisztina than and Gergely Szakacs; Editing by Kirsten Donovan)
