The spectacular fall in bank deposit rates has attracted many small investors into mutual funds. In March alone, fund managers received HUF 173 billion, of which HUF 61 billion in bond funds (mainly Hungarian bond funds investing in Hungarian government securities), 40 billion in money market funds and nearly 14 billion in capital-protected funds.
You can’t be surprised when last May’s 9% promotional deposit rates fell to an average of 4-4.5%, while so-called long-term bond funds investing in Hungarian government bonds can boast 15-19% returns last year. money market funds’ yields of 5-6.5% also outperform current deposit rates of 4-5%.
It was a logical decision by investors to reallocate money to these funds
However, it would be a good idea to understand why Hungarian sovereign wealth funds have performed so amazingly over the past year and why money market funds are outperforming bank deposits and try to determine whether similar returns are expected in the coming year.
As a first step, let’s look at the yields that investors bought Hungarian government bonds over the last one and a half year:
We can see that while investors were willing to buy a 3-year Hungarian government bond at a yield of only 10.47% in January last year for 8.86% at the beginning of May, it has now gradually fallen to 4.66%. investors are now getting almost 6% less returns than they were just over a year ago.
The reason is partly internal but mostly external
The US central bank and partly the European central bank have poured so much money into the market and suppressed the yields of advanced market bonds, so that investors were forced to look for bonds in the Hungarian market that still offer positive real interest rates. (US 5-year government bond yields are currently 0.3% per annum, while inflation is around $ 2%. That is, guaranteed 1.7% per annum to hold US government bonds at the moment. Therefore, many more foreign buyers in the Hungarian market are pushing.)
This demand also depressed interest rates on Hungarian government securities.
But why is this important to us?
The above-mentioned long-term bond funds contain government securities that are due to expire in more than 3 years.
What you need to know about government securities (and bonds in general) is that they pay the same interest at the end of the term as they were initially set. (There are a few exceptions, but these are mostly products that can only be bought by the general public, so we don’t have to worry about them now. I wrote more about bonds here.)
If these funds bought Hungarian government securities at a yield of 10.46% in January last year, those securities will pay such a yield until their maturity.
If the same funds were to buy the same government securities now, they would only get an interest rate of 4.6% until maturity.
It follows that last year’s government bond, which pays nearly two and a half times more interest for up to 5 years, is much more valuable than its counterpart today.