- Hungary failed to attract enough investors at a government bond auction to reach its target
- Investors have become increasingly concerned about the country's ability to pay its debt
- France sold €7.66bn in long-dated government bonds on Thursday, close to the €8bn forecast
- The European Financial Stability Facility comes to the capital markets on Friday in the next test of sentiment
Hungary's currency plunged to fresh lows against the euro on Thursday after the country failed to attract enough investors at a government bond auction to reach its target.
Analysts warned that the central bank might have to take drastic action to raise interest rates in an effort to prevent investors from selling assets after the sale of just Ft35bn in government debt, down from a targeted Ft45bn.
Investors have become increasingly concerned about the country's ability to pay its debt as bond yields have risen, with credit default swaps hitting a record high this week. A new law that curbs the central bank's independence as well as a lack of a clear timetable for negotiations with the IMF and the EU are also unnerving investors.
Yields paid on one-year bills rose to 9.96 per cent, up from 7.91 per cent at a similar auction two weeks previously. The forint spiked to Ft324.10 against the euro.
"We are right into red alert territory for the central bank and I anticipate they will have to step up the policy response in a dramatic way," said Benoit Anne at Societe Generale.
Meanwhile, France sold €7.66bn in long-dated government bonds on Thursday, close to the €8bn forecast, a soothing sign ahead of a key test of sentiment when Europe's bail-out fund plans to raise €3bn in bonds.
Paris sold €4.02bn in 10-year debt at an average yield of 3.29 per cent, up from 3.18 per cent at the last auction in December. The bid-to-cover ratio, which measures demand, fell to 1.643, down from 3.046 last time. The rest of the total amount raised came from bonds due in 2023, 2035 and 2041.
"As expected, the bulk of the auction was concentrated in the 10-year segment," said Annalisa Piazza, economist at Newedge Strategy. "The result is not too bad."
The next test of sentiment in the capital markets comes as early as Friday, when the European Financial Stability Facility comes to the capital markets amid worries over Italy and Spain and fears that the region's big economies face imminent rating downgrades.
Bankers are confident the deal will go ahead this week despite investor concerns over the rating of the fund and continuing concerns that Italy and Spain may be shut out of the debt markets.
The EFSF would almost certainly lose its top-notch triple A status in the event of downgrades of eurozone countries. Standard & Poor's warned last month that 15 eurozone countries, including Germany and France, could be downgraded.
The EFSF owes its top credit grade to guarantees from Germany, France, the Netherlands, Luxembourg, Austria and Finland, which all have triple A ratings.
There was some initial demand for the EFSF bonds when order books opened on Wednesday, although bankers admitted there may be more of a struggle to meet the €3bn targeted, unlike deals in the past that have been fully subscribed in a matter of hours.
The EFSF's first bond issue in January last year saw extremely strong demand with order books surging over €40bn and investors from some of the world's biggest sovereign wealth funds buying the paper.
"We should raise the money, but it is not going to see a record order book like we have before," one banker said. "This is a difficult market. Simply raising the money will be a success in itself."
Germany saw lacklustre demand on Wednesday for a bond auction, in a worrying sign for the EFSF deal.
However, the EFSF deal is expected to be priced this week while the fund still has its triple A rating.
Bankers want to take advantage of the improved sentiment since the start of December, when Italian and Spanish bond yields lurched and worries intensified over the future of the single currency.
The decision by the European Central Bank to launch unlimited loans for three years last month is seen as responsible for boosting sentiment.
Credit Suisse, Deutsche Bank and Société Générale are managing the deal, which follows the EFSF's first short-term bill auction last month and a €3bn issue of 10-year bonds in November.
The fund is likely to price the bonds at about 150 basis points over German Bunds, which is a jump from about 50bp over Bunds in September last year.
However, yields on existing EFSF bonds have dropped sharply since highs seen in November.
The EFSF's benchmark five-year bond has seen yields drop to 2.01 per cent compared with 3.01 per cent at the end of November when fears over the potential seizing up of the eurozone financial system reached a height.