June 21, 2018 / 12:02 PM / 10 months ago

UPDATE 1-Hungary's bond auction attracts good demand, forint still on weak footing

 (Adds bond auction, updates prices)
    By Krisztina  Than
    BUDAPEST, June 21 (Reuters) - Hungary's forint fell to a new
3 1/2-year low versus the euro on Thursday, underperforming its
regional peers, as the impact of the central bank flagging on
Tuesday an eventual end to its ultra-loose policy was fading.
    However, an auction of Hungarian government bonds attracted
sufficient demand, even though yields jumped from levels at the
previous auction. Some traders said the good take-up indicated
that the central bank's message has stabilised the local bond
market to some extent.
    The question is how long this grace period will last.
    "The auction went well, especially in light of the fact that
there were hardly any bids in the secondary market before," a
fixed-income trader said in Budapest.
    He said a bearish flattening continued in Hungarian bonds
with especially the 10-year bonds attracting good demand at the
    "Which way we will go from here will depend on the
international sentiment and the central bank," he added.
    Hungary sold 55 billion forints worth of government bonds at
an auction on Thursday, 5 billion forints more than planned, the
Government Debt Management Agency (AKK) said.
    The average yield on the 10 year bond increased to 3.51
percent from 3.11 percent at the previous auction of this paper.
The 3-year bond yield rose to 1.82 percent from 1.14 percent.
    At 1129 GMT, the forint traded 0.6 percent lower at 325.75
against the euro, losing all its gains posted in the wake of the
pledge by the National Bank of Hungary to firmly focus on
inflation, while keeping main rates on hold.
    The forint earlier on Thursday approached its all-time low
of 327 hit in early 2015, weakening to 326.45, but regained some
ground after the bond auction.
    The central bank at its regular monetary policy interest
rate swap tender offered to inject liquidity into
markets, aimed at supporting the local bond market. The result
of the tender will be announced later in the day. 
     Some traders and analysts said a large bond expiry due on
June 22 also provided support to the local bond market which has
been under pressure from big supply as the debt agency pushed
issuance in the first half of 2018 to fund a larger than
expected budget deficit. The deficit rose due to a pre-financing
of EU-funded development projects.
    "We expect that the NBH will be reluctant to scale down
liquidity injections by FX swaps in the short term in order to
support local bond markets and avoid further rise in interbank
rates hurting borrowers with floating rates," Citibank analysts
said in a note. 
    "Therefore, risks are pointing towards a weaker FX as the
HUF remains an attractive funding currency but a gradual
adjustment in HUF rates may eventually follow if the inflation
outlook moves permanently higher."
    In its fresh inflation report released on Thursday, the
central bank discussed three alternative macroeconomic scenarios
in addition to its baseline expectation, and two out of those
alternative scenarios would require tighter monetary policy.

    The Hungarian bank has been one of the most dovish in
Central Europe, keeping its rates at record lows, while the
Czech and Romanian central banks have already started
    But on Tuesday the Hungarian bank said loose monetary
conditions could no longer prevail until the end of its policy
horizon, for the first time flagging an end to an era of cheap

            CEE        SNAPSHOT   AT                         
            MARKETS              1329 CET            
                       Latest    Previous  Daily     Change
                       bid       close     change    in 2018
 Czech                  25.8520   25.8510    -0.00%    -1.20%
 Hungary               325.7500  323.8900    -0.57%    -4.55%
 Polish                  4.3262    4.3189    -0.17%    -3.46%
 Romanian                4.6710    4.6720    +0.02%    +0.19%
 Croatian                7.3785    7.3835    +0.07%    +0.70%
 Serbian               118.0600  118.0700    +0.01%    +0.37%
 Note:      calculated from                1800 CET          
                       Latest    Previous  Daily     Change
                                 close     change    in 2018
 Prague                 1071.03  1070.030    +0.09%    -0.66%
 Budapest              35181.53  35383.57    -0.57%   -10.66%
 Warsaw                 2144.30   2154.18    -0.46%   -12.88%
 Bucharest              8118.92   8135.47    -0.20%    +4.71%
 Ljubljana               892.35    882.01    +1.17%   +10.66%
 Zagreb                 1830.69   1831.82    -0.06%    -0.66%
 Belgrade   <.BELEX15    727.98    733.59    -0.76%    -4.19%
 Sofia                   631.43    632.27    -0.13%    -6.79%
                       Yield     Yield     Spread    Daily
                       (bid)     change    vs Bund   change
 Czech                                               spread
   2-year   <CZ2YT=RR    1.0740    0.0440   +176bps     +6bps
   5-year   <CZ5YT=RR    1.5870    0.0000   +186bps     +1bps
   10-year  <CZ10YT=R    2.1940    0.0020   +182bps     +0bps
   2-year   <PL2YT=RR    1.6420   -0.0090   +233bps     +1bps
   5-year   <PL5YT=RR    2.5060   -0.0250   +278bps     -1bps
   10-year  <PL10YT=R    3.1420   -0.0260   +277bps     -2bps
            FORWARD    RATE      AGREEMEN                    
                       3x6       6x9       9x12      3M
 Czech Rep          <      1.17      1.29      1.43  #N/A
 Hungary            <      0.74      0.94      1.11      0.23
 Poland             <      1.75      1.76      1.81      1.70
 Note: FRA  are for ask prices                               
 (Reporting by Krisztina Than; Editing by Toby Chopra)
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