Key facts
- Hungary's central bank lowered its inflation target to 2.5% by 2028.
- The move signals a commitment to adopting the euro.
- Foreign investors have increased holdings in forint-denominated bonds to their highest levels since 2019.
- 10-year Hungarian bond yields are trading at 5.64%, lower than Poland's 6.16% and Romania's 7.29%.
- Overseas investors have injected $13.5 billion into Hungary's local bond market this year.
- Foreign holdings in local bonds reached 34% by the end of August.
The National Bank of Hungary's decision to lower its inflation target to 2.5% by 2028 has bolstered investor confidence in Hungary's commitment to adopting the euro, leading to a surge in demand for its bonds. This move, coupled with the new government's pro-EU stance, has seen foreign holdings of forint-denominated bonds reach their highest levels since 2019.
Benchmark 10-year Hungarian bonds are now trading at a yield of 5.64%, outperforming those of Poland (6.16%) and Romania (7.29%). Deutsche Bank noted that overseas investors have poured $13.5 billion into the local bond market year-to-date, with $10 billion flowing in after Peter Magyar's election victory in April. The debt agency AKK reported that foreign holdings in local bonds had risen to 34% by the end of August.
Analysts suggest further yield declines are possible if Hungary adheres to its deficit reduction plans, secures €16 billion in EU funds, and global risks subside. ING analyst Peter Virovacz believes the lower inflation target and the central bank's pause on rate cuts will support the forint and drive down longer-dated bond yields, potentially to 4.9% by year-end. Nomura Asset Management Europe's Recai Gunesdogdu highlighted that the convergence trade is driven by the prospect of euro area integration, with fiscal consolidation being a key factor. Investors are awaiting the government's 2027 budget and medium-term fiscal plan next month to assess deficit reduction progress towards the 3% threshold required for euro adoption. Aberdeen's Viktor Szabo and Schroders' James Ringer also expressed confidence in the new policy direction, with Schroders having increased its hard currency Hungarian bond position.