Hungary’s currency plunged to fresh lows against the euro on Thursday after the country failed to attract enough investors at a government bond auction to reach its target.
Analysts warned that the central bank might have to take drastic action to raise interest rates in an effort to prevent investors from selling assets after the sale of just Ft35bn in government debt, down from a targeted Ft45bn.
Investors have become increasingly concerned about the country’s ability to pay its debt as bond yields have risen, with credit default swaps hitting a record high this week. A new law that curbs the central bank’s independence as well as a lack of a clear timetable for negotiations with the IMF and the EU are also unnerving investors.
Yields paid on one-year bills rose to 9.96 per cent, up from 7.91 per cent at a similar auction two weeks previously. The forint spiked to Ft324.10 against the euro.
“We are right into red alert territory for the central bank and I anticipate they will have to step up the policy response in a dramatic way,” said Benoit Anne at Societe Generale.
Meanwhile, France sold EUR7.66bn in long-dated government bonds on Thursday, close to the EUR8bn forecast, a soothing sign ahead of a key test of sentiment when Europe’s bail-out fund plans to raise EUR3bn in bonds.
Paris sold EUR4.02bn in 10-year debt at an average yield of 3.29 per cent, up from 3.18 per cent at the last auction in December. The bid-to-cover ratio, which measures demand, fell to 1.643, down from 3.046 last time. The rest of the total amount raised came from bonds due in 2023, 2035 and 2041.
“As expected, the bulk of the auction was concentrated in the 10-year segment,” said Annalisa Piazza, economist at Newedge Strategy. “The result is not too bad.”
The next test of sentiment in the capital markets comes as early as Friday, when the European Financial Stability Facility comes to the capital markets amid worries over Italy and Spain and fears that the region’s big economies face imminent rating downgrades.
