Hungarians Rush to Buy Last Inflation-Linked Bonds Before Changes

Published: November 27 2023

Hungarian investors are rushing to buy the last inflation-linked bonds before changes are implemented by the State Debt Management Center (ÁKK). The bonds, called Prémium Magyar Állampapír (PMÁP), have been popular due to their ability to provide high interest rates that follow the inflation rate.

The ÁKK announced that the current series of PMÁP bonds, named 2033/I, will be phased out. These bonds have been popular because their interest rate is linked to the average inflation rate of the previous calendar year, with an additional premium of 0.25%. It is expected that the inflation rate for 2023 can be predicted with minimal error, which means that the interest rate for the bonds in 2024 might exceed 18%. However, to reduce interest expenses, the government has decided to phase out the inflation-linked bonds and introduce new bonds with a fixed interest rate.

Starting from November 29th, the new series of bonds, also called PMÁP, will no longer be linked to inflation. Instead, they will offer a fixed interest rate of 9.9% for the first 1.5 years until April 20, 2025. This fixed interest rate is significantly lower than the previous bonds, leading investors to hurry and purchase the last remaining inflation-linked PMÁP bonds.

Investors quickly responded to the changes and invested a total of 91.6 billion Hungarian forints in the last week into the remaining inflation-linked PMÁP bonds. This is a significant increase compared to previous weeks and has likely depleted the available supply. The ÁKK has even decided to issue an additional 150 billion Hungarian forints worth of bonds to meet the demand.

According to the latest data released by ÁKK, Hungarian retail investors held a total of 6,672 billion Hungarian forints worth of PMÁP investments as of mid-November 2023. If we apply the conservative estimate of an 18% interest rate, this results in an interest payment of approximately 1,200 billion Hungarian forints, which the inflation-linked bonds are expected to generate during the interest periods starting from 2024. It is important to note that the actual burden on the government will be even higher, as previous series of bonds offered higher interest rate premiums above inflation.

Overall, the rush to buy the last remaining inflation-linked bonds highlights investors' eagerness to secure higher interest rates before the changes implemented by the ÁKK.

What are the changes in the Hungarian bond market that investors are rushing to buy bonds? The Hungarian government announced that they will temporarily discontinue the inflation-linked bonds and introduce fixed-rate bonds with lower interest rates. The last series of inflation-linked bonds, which offer an interest rate above 18%, can only be purchased until a certain date. This has led investors to rush to buy these bonds before the change takes effect.

Why are investors rushing to buy the bonds? Investors are rushing to buy the bonds because the current series of inflation-linked bonds will be discontinued. These bonds have been popular because their interest rate is tied to the average inflation of the previous calendar year, with an additional 0.25 percentage point interest premium. The predicted inflation rate for 2023 suggests that the interest rate for the bonds in 2024 could exceed 18%. However, the government wants to reduce its interest expenses, so they decided to discontinue the inflation-linked bonds and introduce fixed-rate bonds with a lower interest rate. This new bond will generate a fixed annual interest rate of 9.9% for the first 1.5 years, which is less favorable compared to the current bonds.

How much money was invested in the bonds last week? Last week, a total of 91.6 billion Hungarian Forints were invested in the last series of inflation-linked bonds. This is a significant amount compared to the average weekly investment of 33 billion Forints since August.

How much interest payment will the bond investors receive? According to the latest information, the total investment in the inflation-linked bonds held by retail investors was 6,672 billion Forints in mid-November 2023. If we multiply this amount by a conservative interest rate of 18%, it results in an estimated interest payment of around 1,200 billion Forints. However, it's important to note that the actual burden on the government will be even higher because previous series of bonds offered higher interest premiums, often exceeding 1 percentage point above inflation.