Hungarian bonds draw strong demand on loose monetary policy, ECB

BUDAPEST: Hungarian government bond prices jumped at an auction on Thursday, with demand boosted by a combination of loose monetary policy and expectations for a decline in euro zone debt prices.

Bonds were rangebound elsewhere in Central Europe, after sources close to the European Central Bank's Governing Council said policy makers saw scope for sending a small signal in June about cutting monetary stimulus.

Central banks in the EU's eastern wing have not shown any sign that a rise in inflation since late 2016 could make them change their loose monetary policies anytime soon.

Hungary's central bank (NBH) is regarded as the most dovish in the region.

At Hungary's auction, the bonds offered were sold with yields on average 8-9 basis points lower than Wednesday's fixing. The government lifted its offer by 11 billion forints to 56 billion as total demand for the bonds was a very high 169 billion forints ($590 million).

Central European yields are still well above levels in many euro zone countries. The 10-year Hungarian bond was sold at 3.23 percent, compared with Spain's levels at 1.67 percent.

But Hungarian and Polish yields are near multi-month lows, which suggests further gains could be limited, market participants said.

Investors have stuck to underweight bond and currency positions in the region in recent months due to concerns over US policies and because of less bets on an inflation rise, Nomura analyst Peter Attard Montalto said.

Demand for the region's bonds have returned as France's first-round presidential elections held on Sunday removed some political risks and optimism over reflation trades in the euro zone has increased, he said.

"(Although) given such low yields and a hunt for carry we are likely to only see some trimming of underweights and not bigger buying (in the region)," he added.

Traders said demand from both foreigners and local banks helped the yield fall.

The NBH's policy to keep forint liquidity high in markets creates demand for government bonds from local banks, said Gergely Urmossy, analyst of Erste in Budapest.

"Despite the pick-up in lending, they will not be able to place out all their forint liquidity as loans, so they buy government bonds," he said.

Regional stocks mostly eased after a rally early this week.

Polish PKN Orlen shed 3.5 percent as investors took profit on an 18 percent rise in April, after the oil group reported a rise in first-quarter net profits, as expected.