'Hungary' for Higher Yielding Government Debt?

| About: Central Europe&Russia (CEE)

Does 5.3% for 4 + years sound good? That’s what Hungarian government bonds are offering.

Investors should consider international bonds for the following reasons:

  • The US government politically seems to have less stability by the day.
  • In this low rate environment, people are often seeking higher interest rates.
  • It's current wisdom that through proper diversification you can reduce risk.
  • Many believe the US dollar currency could decline in value due to government spending.

Currently, we recommend that higher net worth individuals take a look at Hungarian government bonds or get a quote here for international government and corporate bonds, including Hungarian bonds. Investors are often surprised at how easy it can be to buy/invest in foreign government and corporate securities.

Hungary’s Economy

Their economy is a medium-sized and structurally, politically and institutionally newly open economy, and has partnered with the European (EU) market. The 2008 world economic crash triggered an EU-IMF joint-credit line of €20 billion or $25 billion that was lent to Hungary. They have since elected a pro-free market government and has managed to keep spending down, without exhausting it’s 2008 EU-IMF funding, even still in 2010. Hungary's central bank forecasts a budget deficit of 4.5% of GDP for 2010, compared to the UK's roughly 12%, Spain's 11% or America's estimated 10.6%.

Hungary’s cabinet is trying to convince investors, the International Monetary Fund and the European Union that it is committed to budget discipline. Budapest also wants to cut the small business rate to 10% from 19% -- plus, do away with several other small-business taxes, freeze spending, cut public wages by 15% and make charitable donations tax-free. The average single Hungarian taxpayer keeps less than 47% of what he costs his employer—which makes tax cheating wide-spread within a loophole-riddled tax code. It appears Hungary is taking on a very large transformation to make it one of the leading economic nations both for its bond holders and its currency.

Hungary Government Debt

  • Hungary Republic
  • Price 975.50
  • Rated: Moody’s Baa1/ Standard & Poors BBB-
  • Maturity: 02/03/2015
  • Coupon: 4.750
  • Cusip: 445545AC0

Hungary government bonds receive fair ratings (Baa1/ BBB-). The country has made remarkable steps to improve its freedoms. Since leaving the domain of the Soviet bloc, sometimes old habits are hard to break and, in the most recent year, government spending equaled 49.7% of GDP. To reduce their dependence on government and their debt obligation, while increasing efficiencies, we hope they begin a privatization of many government services.

Since Hungary’s debt is yielding in the 5.3% range, the premium in yield for Hungary debt is about 3.5% higher than US Treasury debt for the same 5-year maturity. This is over triple for a comparable government AAA rated debt, but still well short of Brazil government bonds current yields, but in-line with New Zealand and Australia government debt. Even though other countries have higher yields and a more stable economy, Hungary is taking on great transformation into free markets, which give them a greater probability of currency appreciation providing investors a higher total return -- but probably with greater fluctuations.

Their currency, the Hungarian forint, issues could, and will, affect future returns. Yet, America's debt is exploding and there are many academic studies claiming that a diversified portfolio from US currency could actually reduce risk on US citizens' portfolios; especially if they have an over-abundance or, worse yet, 100% of their assets in US dollars.

Hungary government bonds maturing in February 2015 are yielding around 5.25-5.35%. Here’s the forint’s (their underlying currency) recent indication: 1 forint = 0.0.4378 US dollars (July 8, 2010).

Hungary’s Restrictions

  • $10,000 minimum.
  • Smaller investment sizes often give lower yields.

Buying in a single country increases your investment risk due to currency fluctuation and ownership of foreign debt (knowing that the volatility of each underlying security is higher). But, if you properly build a diversified portfolio utilizing several countries, both government and corporate debt, the portfolio could actually reduce risk while adding significant income.

Currently, it is our opinion that the future stability of the US dollar is at a very high level of risk for increased volatility -- higher than I've ever seen it in my 25-year career. It's due to the twin issues of overall US government spending increases, making a very large corresponding debt even larger, along with the great increase in political instability that appears to be growing by the day. These two titanic shifts will, in my opinion, greatly increase the underlying volatility of the US dollar with a higher probability that the US dollar will underperform.

Hungary’s World Rank: 51 Regional Rank: 24 of 43

Ten Economic Freedoms of Hungary

76.8 Business Freedom Avg 64.6 75.0 Investment Freedom Avg 49.0
87.5 Trade Freedom Avg. 74.2 70.0 Financial Freedom Avg 48.5
68.6 Fiscal Freedom Avg. 75.4 65.0 Property Rights Avg 43.8
25.9 Government Spending Avg. 65.0 51.0 Fdm. from Corruption Avg 40.5
74.1 Monetary Freedom Avg. 70.6 67.6 Labor Freedom Avg 62.1
Click to enlarge

Quick Facts


  • 10.0 million


  • $194.0 billion
  • 0.6% growth
  • 2.4% 5-year compound annual growth
  • $19,330 per capital


  • 7.8%

Inflation (CPI):

  • 6.1%

FDI Inflow:

  • $6.5 billion


Hungary, with its roots still from the broken Soviet system, is making great strides from complete central planning control to become a free nation, and is accelerating and embracing the proven free markets system. With that said, clients looking for higher yield and currency growth should look to Hungary for a good income and chance for real currency growth, but possibly accepting much higher levels of fluctuations in returns, than most advanced nations.

Disclosure: No positions