Hungarian central bank seeks redemption in swap auction rerun

Bloomberg

For a central bank that’s become used to an almost limitless ability to steer markets, Hungary’s rate meeting served as a measure of reckoning, with officials looking to guide their latest round of unconventional easing back on track.
Policy makers, who had to scramble to revamp the rules after a swap sale sparked the biggest bond sell-off in more than a year, dialed back the self-confidence in their resolve to reduce long-term borrowing costs. After leaving the main rates unchanged, they removed a reference to a still-steep curve from the post-meeting statement. The next swap offering on Thursday may be a crucial test for the easing push, according to Erste Group Bank AG and Aegon NV.
After years of shaping the domestic market with an array of unconventional tools, the bank is now fighting the tide of global reflation as it tries to lower long-term borrowing costs. As investors digested the comments, bond yields edged higher and swap rates shifted lower, widening the 10-year asset-swap spread, a sign that investors may have become skeptical of policy makers’ ability to drive the bond market.
“Bonds look rich at these levels on an asset-swap basis, so either swap rates will need to shift lower or yields will have to adjust higher,” said Adam Bakos, who helps oversee the equivalent of 2.5 billion euros ($3.1 billion) as head of fixed income at Aegon in Budapest. “While the central bank will look to achieve its goals in the longer run, the price at Thursday’s swap sale will be a key indication of their appetite to ease further.”
Hungary is looking to lower long-term rates at a time when the European Central Bank is moving closer to pulling out of a bond-buying program that at its peak helped drive borrowing costs to record lows across the continent. Last month, rate setters in Budapest hailed their November announcement of the new swap instruments and a mortgage-bond purchase program for “significantly” reducing long-term borrowing costs. But since then, yields have failed to resist an increase in European markets.
Five-year German yields rose above zero for the first time in two years, pushing 10-year rates in Budapest to the highest since November. The difference between Hungary’s 10- and two-year yields has widened 25 basis points since the December rate meeting, more than the 20 basis-point increase for Romanian debt and 15 basis points for German bunds.
Hungarian central bankers said the unconventional instruments would be effective in maintaining loose financing conditions and said they would focus on the relative level of long-term yields compared with peers when assessing the program’s success.