Understanding the Rules for Selling Hungarian Government Bonds: Survey investigates investor knowledge

Published: November 28 2023

The Hungarian State Treasury has conducted a survey to assess the knowledge of investors who use the Webkincstár service regarding the rules and costs of redeeming government bonds. The survey aims to understand how these factors impact investment decisions.

The survey is valuable for understanding the goals and preferences of investors, which can help in the development of new government bond schemes and improvements to the Webkincstár service. However, it is notable that the survey includes questions about early redemption options and associated costs, which may cause concern among investors.

In a surprising move, the inflation-linked government bonds, known as PMÁP, will be temporarily suspended and replaced by fixed-rate bonds with lower interest rates. The last series of PMÁP, which offers an interest rate of over 18%, can only be purchased until a certain deadline. This announcement led to a significant surge in investments in PMÁP just before the interest rate cut.

While PMÁP can be highly profitable this year and next due to expected high inflation, their appeal may diminish from 2025 onwards as inflation stabilizes. It is expected that many investors will sell their PMÁP holdings prematurely, making the repurchase cost set by the Hungarian State Treasury crucial.

The current repurchase cost for PMÁP is 1%, which is favorable for investors. Early redemption in this case would result in a minimal expense of only 100,000 HUF for a 10 million HUF investment, despite generating approximately 1.8 million HUF in 2024. However, the survey's focus on repurchase costs suggests the possibility of an increase. This has been seen before, such as with the MÁP+ bonds, where the repurchase cost was raised from 0.25% to 0.5%. Despite the higher cost, most investors withdrew from MÁP+ and switched to inflation-linked bonds, indicating that the increased cost did not significantly affect their investment decisions.

If inflation decreases to a level where PMÁP no longer offers attractive interest rates and alternative investment options become more lucrative, a significant wave of sales may occur. However, if average annual inflation in 2024 remains around 6% and PMÁP continues to yield over 18% interest next year, a doubling of repurchase costs, as seen with MÁP+, is unlikely to significantly affect the financial benefits of PMÁP investments.

What is the Magyar Államkincstár? The Magyar Államkincstár is the Hungarian State Treasury, responsible for managing and administering the state's financial resources.

What is the Webkincstár service? The Webkincstár service is an online platform provided by the Magyar Államkincstár for investors to purchase Hungarian government bonds and other securities.

What is the purpose of the survey sent to investors using the Webkincstár service? The survey aims to assess investors' knowledge of the rules for selling Hungarian government bonds, including the redemption rules and associated costs, and their impact on investment decisions.

What are the main concerns addressed in the survey? The survey specifically addresses the early redemption possibility and associated costs of inflation-linked government bonds. These bonds have been popular among investors due to their high interest rates, but their attractiveness may decrease if inflation stabilizes in the future.

What are inflation-linked government bonds (PMÁP)? Inflation-linked government bonds, known as PMÁP in Hungarian, are bonds whose interest rates are adjusted based on the annual inflation rate. They offer higher interest rates to investors.

Why did Hungarian investors rush to invest in inflation-linked government bonds? Investors rushed to invest in inflation-linked government bonds before a significant interest rate cut was announced. These bonds were expected to provide returns above 18%, making them lucrative investments.

What is the potential impact of inflation consolidation on inflation-linked government bonds? If inflation stabilizes and decreases significantly starting from 2025, the attractiveness of inflation-linked government bonds may diminish. Investors may start selling their holdings early, which would result in the Hungarian State Treasury having to buy back the bonds.

What is the cost of early redemption of inflation-linked government bonds? Currently, the cost of early redemption is 1% of the investment. For example, if someone has a 10 million Ft investment, the early redemption cost would be only 100,000 Ft.

Is there a possibility that the cost of early redemption may increase? The Hungarian State Treasury is considering increasing the cost of early redemption of government bonds. Previously, the cost was increased for another type of bond called MÁP+. However, the actual impact of such an increase on the financial benefits of the investment remains to be seen.

What are the implications of a potential increase in the cost of early redemption? If the cost of early redemption increases for inflation-linked government bonds, it may discourage investors from selling their holdings early. This could have an effect on the financial benefits of the investment and investor behavior.

What other investment options are available in Hungary? There are other investment options available in Hungary apart from government bonds. These include various savings and investment products offered by banks and financial institutions.

How can I calculate my pension savings? The Magyar Államkincstár provides a pension savings calculator that can help individuals calculate their pension savings based on their investment options and contributions.