Hungarian government bonds could offer significant upside if the country successfully introduces the euro, according to an analysis published by G7.
The Hungarian bond market is currently looking increasingly attractive, the analysis argues, following a sharp fall in yields after the new Tisza government came to power.
According to G7, investors have priced out some of the risks associated with the previous government, including corruption concerns, excessive spending and persistently high budget deficits. But the biggest potential catalyst could be Hungary’s declared intention to adopt the euro.
Euro adoption could trigger major bond market convergence
The analysis argues that introducing the European currency would resolve several longstanding problems for Hungary, including the population’s declining confidence in the forint.
A significant share of Hungarian household savings – reportedly close to 40 per cent – is already held in euros. The introduction of the common currency could therefore help align the country’s financial system more closely with the euro area.
Rather than focusing on the technical requirements of euro adoption, such as ERM II participation and the Maastricht criteria, G7’s analysis looks at what could happen to Hungarian government bonds if the process succeeds.
If Hungary were to adopt the common currency in around four years, as currently envisaged, bonds that are currently denominated in forints would eventually become euro-denominated assets. That could have major implications for their yields.
Hungarian yields are still well above eurozone levels
The difference can already be seen in the current government bond market. French, Italian and Greek 10-year government bond yields are currently just below 4 per cent, while Hungary’s 10-year yield stands at around 5.4 per cent.
The analysis argues that, if Hungary successfully progresses towards adoption, Hungarian yields could eventually converge towards those of other euro-denominated government bonds. This would not necessarily happen gradually or in a straight line.
Instead, the market could react strongly to major milestones such as Hungary’s 2027 budget, entry into ERM II and progress towards meeting the requirements for euro adoption.
Could Hungarian bonds deliver a double-digit gain?
G7 estimates that the yield difference between Hungarian and comparable eurozone 10-year bonds represents roughly 150 basis points of potential convergence. Because the average duration of a Hungarian 10-year government bond is around eight years, the analysis estimates that the resulting price appreciation could be approximately 12 per cent for this segment of the market.
Longer-dated bonds could offer even greater potential upside, while shorter maturities would generally have less. However, these figures are not a guaranteed return. Bond prices and yields will also depend on global interest rates, inflation, fiscal policy and investor sentiment at the time. The key argument is that successful euro adoption could create a one-off repricing event as investors reassess the risk associated with Hungarian government debt.
The biggest gains may come before the common currency arrives
Importantly, investors would not necessarily have to wait until Hungary physically adopts the euro for the potential repricing to occur. Markets typically price in future developments well before they actually happen.
As a result, major milestones could trigger successive waves of appreciation. These could include the 2027 budget, Hungary’s possible entry into ERM II and evidence that the country is successfully meeting the fiscal and economic criteria required for euro adoption.
If those developments convince investors that euro adoption is genuinely achievable, Hungarian government bonds could become increasingly attractive compared with their current valuations.
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Global market risks remain
The outlook is not without risks. No one can know where international bond yields will stand four years from now. Hungarian government bonds will continue to be influenced by global developed and emerging markets, as well as by international interest rates and risk appetite.
The analysis notes that global markets have become increasingly sensitive to rising government debt and weak fiscal figures in recent years. A major international market sell-off could therefore undermine the potential gains from Hungarian convergence.
Nevertheless, the analysis concludes that, assuming Hungary successfully follows through with its euro plans and international markets remain relatively stable, Hungarian government bonds could offer an unusually attractive opportunity.
For international investors, the potential combination of relatively high current yields and eventual convergence with euro-denominated bonds could make Hungarian debt particularly interesting in the years ahead.
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