Short interest in Hungarian sovereign bonds has spiked in the past few weeks, according to Reuters. The number of aggregate bonds out on loans increased by 55 percent in the period between Feb 14 to March 18, reaching $567 million. Hedge funds are betting on (or against) the future of the country.
The elevated short exposure in Hungarian bond yields materialized in the weeks prior to European Union’s crucial summit held in Brussels on March 14-15. There were speculations that EU will contemplate Hungary’s membership in the union if the actions of Hungarian government defy European laws.
Hedge fund managers are confused and unsatisfied with the tight bond yields that persist in Hungary, the yields do not reflect the country’s present economic and political problems. Presently the 15 year yield is at 6.8 percent which is below the emerging markets standard.
Hungary’s debt has received negative or junk rating from all the major rating agencies. As of now 45 percent of Hungary’s debt is held by foreigners. $20 billion is held by external owners in Hungarian forint (HUF) denominated bond holdings.
The increased bearish bet on Hungarian debt especially stands out when compared against long-term interest in other European sovereign, notably short interest in sovereign issues of eastern European countries like, Czech, Slovakia and Ukraine has declined in the past weeks.
Hungary’s Prime Minister, Viktor Orban has come under a lot of criticism lately. The present government is accused of trying to pass laws that could be used to undermine the sovereignty of judiciary and freedom of media, if exploited.
Orban has also been censured for appointing a close associate of his as head of Hungary’s central bank, he also dismissed several economists from Hungary’s Central Bank. Orban has been campaigning to convert the country’s debt, 79 percent of GDP, held in Swiss franc and euros to forint. He believes that at present the country’s currency has an edge on euro, which his country should benefit from.
There are several hedge funds who have been shorting Hungarian forint and have held long or short positions in Hungarian interest rates in the past. In addition to LNG Capital, ECM Asset Management and possibly Toscafund’s short position in Hungarian debt, our research shows that Hutchin Hill (+2.8 percent in Jan 2013) has profited from Hungarian debt trades in its macro relative value strategy in January.
In contrast Pharo Macro Fund (+4.06 percent YTD Feb) gained from long position in interest rates back in November 2012. In early 2012, hedge funds have also profited from the disparity between forint bonds and EUR denominated bonds.
Tiger Cub, Argonaut Capital (up +3.1 percent YTD Feb), added a short position in forint in February on the expectation of fiscal stimulus from central bank and lower interest rates in future. Omni Macro (+0.4 percent YTD Feb) has kept a short position in HUF for some time now which was further added to in February. The hedge fund managers call Hungary’s economic policy as “unorthodox and ultra-easy”.
There are still several investors who hold short term Hungarian bonds on the expectation that yields will fall further after interest rates are cut by central banks, the long exposure in Hungarian bonds is manifold of the short interest. However the recent jump in short interest is noteworthy. HUF has fallen 7.6 percent, to 235.47 against USD, year to date.