Hungary Bonds Surge as Central Bank Cuts Inflation Target

The Hungarian central bank's decision to lower its inflation target has sent a signal to investors that the country is moving closer to adopting the euro.

The National Bank of Hungary reduced its inflation target from 3% to 2.5% effective from 2028, stating it should anchor inflation at lower levels and support meeting the requirements for euro adoption.

Hungary's benchmark bonds have been the darling of foreign investors this year, with a 10-year bond trading at a yield of 5.64%, below Poland's 6.16% and Romania's 7.29%. Foreign holdings of Hungarian bonds surged to their highest levels since 2019, reaching 34% by the end of August.

Analysts say there is room for yields to fall further if Hungary delivers on its deficit reduction plans and receives €16 billion in European Union funds unfrozen by Brussels. The central bank's decision to pause rate cuts also supports the long end of the bond curve, which could see a further meaningful wave of foreign inflows.