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Is the Heyday of the Government’s ’Super Bond’ Coming to an End?

Balázs Frei 2020.09.29.

As a result of high inflation caused in part by the effects of the coronavirus pandemic, the Hungarian Government Security Plus (MÁP Plusz) bond, nicknamed the ’Super Bond’ for its high yields, may become less attractive to investors. This could allow inflation-linked bonds and investment funds to pick up the slack.

The government bond launched last June has been immensely popular since its inception. It made headlines by achieving the highest ever weekly turnover of over HUF 529 billion in its first week, and has remained a favored option for investors ever since. This is mainly due to its high yield and the perception that as a government bond guaranteed by the state it is a safe investment.

The bond is issued with a 5-year maturity, with fixed interest rates for set periods, mostly each year. The rates increase over time, starting at 3.5% and rising to 6% by the final year. ’Super Bonds’ yield an annual average of 4.95% over five years, and a total of 27.35% over the entire period. Interest earned on these bonds is also tax free, making them all the more attractive. They are offered at par with a one week subscription period.

Fin Min: Hungarians Invest over HUF 4,400 bn in Plus Govt Bonds
Fin Min: Hungarians Invest over HUF 4,400 bn in Plus Govt Bonds

Hungarian residents have bought Hungarian Government Securities Plus bonds for retail investors to a total value of 4,407 billion forints (EUR 1.28bn), the finance minister said on Thursday, evaluating the first one year of the programme. Mihály Varga said the “Plus” bond was the most popular retail government security, absorbing half of all retail savings. […]Continue reading

The government’s primary aims with offering such an alluring bond appear to have been threefold: (1) to reduce cash hoarding by convincing people to invest their cash savings; (2) to reduce external refinancing risk by converting foreign debt into domestic debt; (3) to sustain a high savings rate among households. An important secondary aim was to rein in the slightly out-of-control real estate market by offering a safer alternative to its high yields. According to István Karagich, CFO of Blochamps Capital who spoke on the matter to Forbes in January, by the beginning of this year it had more or less succeeded in all but the first.

Unfortunately for some, in doing so it has had a significant impact on investment funds. Hardest hit were real estate funds; their HUF 1100 billion capital stock in May of last year fell to HUF 930 billion by October, said Karagich. Other types of funds have essentially experienced no growth in their capital stock since the introduction of MÁP Plusz, at least until the onset of the pandemic.

The heyday of the ‘Super Bond’, however, might be coming to an end, in large part as a result of changing inflationary expectations. Gergely Bíró, CEO and President of Diófa Alapkezelő Zrt. told Portfolio.hu yesterday that while he expects no significant fall in the popularity of MÁP Plusz bonds, he anticipates no increase either. This is because, while the ‘Super Bond’ offers a fixed average annual return of 4.95%, core inflation – that is, the long-run change in price level – is currently 4.7%. This wipes out most of the gains. Thus, as inflation is expected to be high over the next few years, inflation-linked bonds are likely to become more popular.

Negative Growth and Higher Inflation Predicted by Hungary's National Bank in Revised Forecast
Negative Growth and Higher Inflation Predicted by Hungary's National Bank in Revised Forecast

The National Bank of Hungary now expects the economy to contract between 5.1 and 6.8% this year and annual inflation to be 3.5-3.6%, according to its latest quarterly Inflation Report released on Tuesday. Assuming a V-shaped, rapid recovery from the economic downturn caused by the coronavirus pandemic, the institution previously forecast an annual GDP growth […]Continue reading

Bíró also believes that the economic impact of the coronavirus has lead to a long-term change in savings attitudes. At the beginning of the pandemic, people started stockpiling cash and spending less. While this behavior subsided by early summer, to Bíró, it appears that a portion of Hungarians realized that having enough savings for a couple of months provides them with a sense of security. Apart from this, amongst those that were already financially conscious, demand for professional wealth management has increased. Bíró posits that this is because they saw that the market reacts to changes very rapidly, and recognized that one can profit off of this quite well if they make the right calls.

As the MÁP Plusz became less attractive due to inflation and as some people have started to save more while many have also begun to seek out professional wealth management solutions, prospects are now looking quite good for investment funds. If inflation remains high, people will continue to look for a place for their savings which is more or less protected against inflation. This could mean a further increase in stock market activity and the revitalization of the real estate market.

Featured photo by Zoltán Balogh/MTI