The Hungarian government is once again opening up its high-yielding investment-grade bond to non-resident foreigners - including an option to invest remotely without setting foot in Hungary.
This may be the most interesting sovereign bond opportunity in 2024 and 2025. None of this article is financial advice, however, I do have strong enough conviction on this investment to have personal exposure. I see strong risk / reward, after considering Hungary’s credit rating and currency risk, relative to the tax-free 15% fixed yield in the first 1.5 years.
Key outline on how the bond works:
This may be the most interesting sovereign bond opportunity in 2024 and 2025. None of this article is financial advice, however, I do have strong enough conviction on this investment to have personal exposure. I see strong risk / reward, after considering Hungary’s credit rating and currency risk, relative to the tax-free 15% fixed yield in the first 1.5 years.
Key outline on how the bond works:
- Bondholders receive a fixed yield of 10% pa. in the first 1.5 years (thus 15% for the period), paid once per year. In subsequent years, the yield is calculated at Hungarian CPI + 0.5-1%. E.g. if / when CPI returns to the National Bank of Hungary’s target of 3%, your yield is 3.5-4%. However, if / when that occurs, there is a good chance the HUF would also strengthen against EUR / USD, thus you may profit both from the yield as well as currency appreciation.
- The inflation-linked aspect provides downside protection. Should a black-swan event occur that significantly impacts the HUF (Hungarian Forint), inflation is likely to spike and thus a higher nominal bond yield.
- The bond’s maturity period is 9 years, however, you can redeem early with a 1% early redemption fee. The redemption value of the bond is set by the Hungarian government daily and thus differs from how institutional bonds work.
- All interest income is tax-free on the Hungarian side. The bond is also guaranteed by the Hungarian State. I.e. the Hungarian government would have to go bankrupt in order for you to not get paid, which being a EU member state is highly unlikely.
- This bond is mainly designed for Hungarian citizens but non-residents are also open to investing on the same terms. The yield is superior to that of the Hungarian institutional bonds. However, you cannot directly profit from leveraged yield differentials from re-selling the bond, if / when rates come down.
- Apart from the high yield, it also provides currency and geo-diversification benefits. In my view, the risk/reward is far superior to that of opening a bank account in Georgia (often hyped up in the offshore space), where the country is much poorer and volatile, coupled with local banking sector risk and limited / no bank deposit insurance guarantees.
My detailed analysis on the risk / rewards:
Hungary was most recently rated Baa2 by Moody’s in September 2023, with a stable outlook. This places Hungary:
- Just below Spain (Baa1)
- Same tier as Cyprus and Croatia (Baa2)
- Above Romania, Italy and Greece (Baa3)
- ll of the above is within the ‘lower medium’ range of ‘investment grade’
Let’s compare the Hungarian yield relative to the above, taking 1-year yield for reference:
- Spain: 3.556%
- Cyprus: 3.557%
- Croatia: 3.882%
- Romania: 6.141% (also a non eurozone country within the EU)
- Italy: 3.743%
- Greece: 3.438%
It’s true that with the exception of Romania, the above countries are in the Eurozone. So let’s also compare this against Hungary’s two major Central & Eastern European (CEE) neighbors, who are also EU countries not in the eurozone:
A 10% yield on a sovereign bond normally requires investing in junk bonds, e.g.
Now let’s look at the Hungarian Forint (HUF)’s performance: it has indeed performed weaker than its CEE neighbors since the start of 2022 (reference point in the chart before the Russian invasion), due to a looser monetary policy in prior years and higher inflation throughout 2022. However, the Hungarian central bank responded by hiking central bank rates to 14% in late 2022. This was done without crashing the Hungarian economy; the 2023 economic contraction stands at 0.7% and the unemployment rate at 4.6%.
[image:40E1EBBA-EA13-4EB5-83E9-9135490CA7B7-97578-00000CE58013F561/Screen Shot 2023-11-27 at 21.36.38.png]
ING bank forecasts also forecast HUF to gradually recover:
[image:D992BD45-8CA7-4FFA-B4D5-91834F277F71-97578-00000CE9A88D9A06/Screen Shot 2023-11-27 at 21.49.02.png]
5. The European Commission forecasts Hungary’s GDP to return to growth in 2024, and inflation to come down significantly to the single digits.
[image:6C9C5D98-5C8A-46F1-ABE8-B0EF3582C6BC-97578-00000CE7EBA03280/Screen Shot 2023-11-27 at 21.43.49.png]
Hungary’s macroeconomic indicators outperform that of many Southern EU countries. Unemployment is amongst the lowest, whilst government debt in the middle of the pack.
[image:9AE98F90-C169-4F4E-8DFC-4B7E448DA430-97578-00000CE8ECCFF498/Screen Shot 2023-11-27 at 21.46.51.png]
[image:8B66DA85-1C2A-4EB7-9AAA-60255F226DFE-97578-00000CE93ADB7425/800px-General_government_debt,_2021_and_2022_(¹)_(General_government_consolidated_gross_debt,_%_of_GDP)_Oct2023.png]
Summarizing the opportunity, it appears best for investors who:
1. Have a sufficiently positive outlook on Hungary to believe that the total return (bond yield + HUF currency appreciation) will outperform holding bonds in your home country and/or simply holding US Treasuries. If you’re an American, this can also be a good way to hedge dollar weakness.
2. Understand that the HUF is relatively volatile and be able to stomach this volatility (i.e. you are able to ‘wait out’ any currency drawdowns out, rather than being forced to sell).
3. See the value in diversifying your cash holdings into Hungary, which is perhaps the most geo-politically unique and sovereign country within the EU. By holding Hungarian bonds, you have the Hungarian government as your counterparty, thus removing banking system risk. Furthermore, for a malicious actor to come after your Hungarian bonds, they would first need a Hungarian court order and thus may also have asset protection benefits.
_
I’ve been investing in Hungary since 2018, both in real estate and fixed income. I have direct exposure to the aforementioned Hungarian bond, however, I did invest in an earlier issuance at a higher yield (15-20%).
If you’re interested and considering to invest at least 20,000 EUR, this is how I can help:
- Poland: 5.323% (PLN) rated A2 by Moody’s
- Czech Republic: 5.229% (CZK) rated Aa3 by Moody’s
A 10% yield on a sovereign bond normally requires investing in junk bonds, e.g.
- South Africa (8.815%, 5 years, Ba2)
- Uganda (10.01, 2 years, B2)
Now let’s look at the Hungarian Forint (HUF)’s performance: it has indeed performed weaker than its CEE neighbors since the start of 2022 (reference point in the chart before the Russian invasion), due to a looser monetary policy in prior years and higher inflation throughout 2022. However, the Hungarian central bank responded by hiking central bank rates to 14% in late 2022. This was done without crashing the Hungarian economy; the 2023 economic contraction stands at 0.7% and the unemployment rate at 4.6%.
[image:40E1EBBA-EA13-4EB5-83E9-9135490CA7B7-97578-00000CE58013F561/Screen Shot 2023-11-27 at 21.36.38.png]
ING bank forecasts also forecast HUF to gradually recover:
[image:D992BD45-8CA7-4FFA-B4D5-91834F277F71-97578-00000CE9A88D9A06/Screen Shot 2023-11-27 at 21.49.02.png]
5. The European Commission forecasts Hungary’s GDP to return to growth in 2024, and inflation to come down significantly to the single digits.
[image:6C9C5D98-5C8A-46F1-ABE8-B0EF3582C6BC-97578-00000CE7EBA03280/Screen Shot 2023-11-27 at 21.43.49.png]
Hungary’s macroeconomic indicators outperform that of many Southern EU countries. Unemployment is amongst the lowest, whilst government debt in the middle of the pack.
[image:9AE98F90-C169-4F4E-8DFC-4B7E448DA430-97578-00000CE8ECCFF498/Screen Shot 2023-11-27 at 21.46.51.png]
[image:8B66DA85-1C2A-4EB7-9AAA-60255F226DFE-97578-00000CE93ADB7425/800px-General_government_debt,_2021_and_2022_(¹)_(General_government_consolidated_gross_debt,_%_of_GDP)_Oct2023.png]
Summarizing the opportunity, it appears best for investors who:
1. Have a sufficiently positive outlook on Hungary to believe that the total return (bond yield + HUF currency appreciation) will outperform holding bonds in your home country and/or simply holding US Treasuries. If you’re an American, this can also be a good way to hedge dollar weakness.
2. Understand that the HUF is relatively volatile and be able to stomach this volatility (i.e. you are able to ‘wait out’ any currency drawdowns out, rather than being forced to sell).
3. See the value in diversifying your cash holdings into Hungary, which is perhaps the most geo-politically unique and sovereign country within the EU. By holding Hungarian bonds, you have the Hungarian government as your counterparty, thus removing banking system risk. Furthermore, for a malicious actor to come after your Hungarian bonds, they would first need a Hungarian court order and thus may also have asset protection benefits.
_
I’ve been investing in Hungary since 2018, both in real estate and fixed income. I have direct exposure to the aforementioned Hungarian bond, however, I did invest in an earlier issuance at a higher yield (15-20%).
If you’re interested and considering to invest at least 20,000 EUR, this is how I can help:
- A 30 minute consulting call to assess whether it’s the right fit for you, and if so, I can carry out an account opening eligibility check for you at no additional cost. The fee is 90 EUR and you can book it here. If you decide to move forward with account opening, the fee is fully refunded.
- Remote account opening and bond purchase support, for 990 EUR. You will have a personal brokerage account with one of the largest brokerage houses in Hungary, which is also authorized by the Hungarian government as one of their bond dealers.
- You will be able to transfer in a wide range of currencies, and the brokerage firm will help you convert it into HUF at near mid-market rates. This brokerage account can be used beyond the bond purchase, as part of your portfolio of diversified global accounts and to access further investments in the Hungarian market.
- Want to visit Budapest, check out underpriced local real estate + open the above account in person? Contact us for a customized offer!
Disclaimers:
- The 30 minute call will not include disclosure of the exact brokerage firm, which will be disclosed after you engage us for the remote account opening support.
- Please note this service is for individuals from non-sanctioned countries only, and companies are not eligible to purchase this particular bond. The entire remote account opening process takes around 4 weeks. You will need to visit a Hungarian Embassy in your current country to complete one particular piece of paper work. The process takes no more than half an hour and cost $50-100 in most countries.
