November 29, 2022

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Here are the new residential government bonds – which ones are worth investing in?

Residential government bonds promising initial returns of more than 11% have been discontinued: From today, premium and new bonus government bonds can also be purchased. We have already written about the most important changes and innovations, but we will update them again broadly.

What you need to know about the new PMÁP and BMÁP?

The Premium Hungarian government paper (PMÁP), major changes:

  • The base value of the new series changes from HUF 1,000 to HUF 1.
  • The interest rate of the two new series will be a “hybrid” interest rate, in the first interest period it will pay a fixed interest rate of 11.75% per annum, then from the second interest period it will become a classic government bond. Variable interest rate.
  • Investors will be able to earn a higher rate of interest sooner, as the interest payment dates have been brought forward to 4- and 6-years (but the maturity period has been slightly increased for both papers).

Repackaged Bonus Hungarian Government Paper (BMÁP) and its key features:

  • 3 years tenure with quarterly interest payments.
  • The interest basis is given by the average interest rate of 3-month DKJ bids.
  • The interest premium is 1%.
  • During the first interest period, the annual interest rate is 11.32%.

Hence the two instruments have different interest rates and hence their attractiveness is determined by the growth of the interest rate base in addition to the interest premium.It is inflation on premium government bond and 3 month DKJ yield on bonus bond.

We look at whether it’s worth replacing existing inflation-tracked government bonds with new ones, and which government bonds are the best choice for investors looking to invest for 1, 3 or 5 years.

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Assumptions:
For the development of the inflation path for each year, we used the average values ​​of the MNB’s newly released inflation forecast.
We have left the interest rate on Bonus Magyar Allambafir unchanged at 11.32% till the end of the term.
For yields on Hungarian government bonds, we used the Treasury quote.
In the case of PMÁP and BMÁP, we calculated a recovery cost of 1% where premature recovery takes place.
In each case, we calculated an initial investment of one million HUF and assumed that the interest earned during the period would be reinvested.

I have a million forints, what should I invest in for 1, 3 or 5 years?

We looked at how much money we could get from a million forints by investing in various maturities and various government bonds. Let’s take these one by one:

1 year investment

If someone wants to commit their money for one year according to the above assumptions Investing your money in a new 6-year premium government bond will do better, even if you lose 1% of the interest when you exit after a year. A 4-year PMÁP offered the highest interest of HUF 130,000 available with a 6-year PMÁP. Although residential government bonds have special one-year plans (1MÁP, KTJ I.), their interest rate of 7% is much lower than other government bonds studied.

3 years investment

As we look longer and longer, the valuation becomes more and more uncertain because we don’t know how inflation will evolve, just as we don’t know the future bid yield of the 3-month DKJ (note that here it is after The MNB halted the interest rate hike cycle, the short side yields will decrease in the next 2-3 years). If we adhere to the above assumptions, then In 3 year period, 3 year bonus government bond comes firstFollowing the 3-year yields of the new 6-year PMÁP.

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5 years investment

The 2026/D government bond, also available to retail investors, has a five-year high yield.However, in this case, it is important to note that the early redeemer of the paper runs a higher exchange rate risk (so we now calculate by holding to maturity). Those who wish to stay with Retail Government Bonds should opt for the new 6-year PMÁP on Retail Government Bonds. Of course, contrary to the MNB’s expectations, if we have to adjust to high inflation in the long run, the order could easily be disrupted.

Is it worth getting out of an existing premium government bond?

Let’s look at more extreme cases. There are probably few people who have thought about this Is it worth replacing a previously purchased PMÁP series with a new one?. In this case, it is worth knowing that the terms of the old and new series are slightly different (for example, from 6 years to 6.5 years).

Let’s look at two cases.

a) We exit the old series and enter the new one until the tenure of the new series is over

As the calculations in the table below show, if someone buys from the PMÁP series coming out in June, the In the case of 4- and 6-year premium government bonds, the exchange may be worth itEven with 1% recovery cost.

  • The new 4-year PMÁP already exceeds the interest rate of the old series payable at the same time in the 4th year.
  • The new, 6-year note has already reached an interest level of 4 months prior to the old, 6-year PMÁP last coupon payment (already the new note due February 6th, offering the same interest as the old series. Only on June 6th.
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All in all, it might be worth replacing the old series with the new inflation-tracking papers based on two maturities (but remember, this would extend our earlier maturities a bit).

b) We exit the old series and enter the new one, but keep the original term

When there may be a case An investor is thinking of switching to a new premium government bond, not wanting to increase the original maturity. However, according to our calculations below

Hence, it is no longer worth buying new government bonds and the investor is better off holding the old series till maturity.

(The flexibility comparison in the rows of the table is due to the fact that the new 4-year PMÁP has to be extended by one month to have the same maturity as the old one, and 4 months have to be added to the new 6. year paper.)

Summary

  1. So, if someone is looking for the best opportunity in the government bond market for 1, 3 and 5 years, Over a 1-year horizon, the new 6-year PMÁP outperforms, over a 3-year horizon, with BMÁP, and over a 5-year horizon, the 5-year government bond outperforms.. However, it should be remembered that we do not know the future development of inflation and 3-month DKJ yields and we can only make assumptions about them.
  2. For those already holding premium government bonds of old series and thinking of switching, It is only worth switching to new PMÁPs if they last until they expire, keeping the original expiration date of the old series, they come out worse than the old series. This is because the saver suffers a 1-1 exchange rate loss at the moment of conversion and at redemption due to early expiration, which means a total exchange rate loss of 2% (in the first case, however, only the investor suffers. 1% is a one-time cost, from old to new).

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