No significant progress has been made in facilitating domestic banks’ access to long-term forint funding, due to the small quantity of bonds issued in the primary market; however, the MNB’s mortgage bond purchase programme has contributed to a decline in yield spreads on forint mortgage bonds. The MNB will cease purchasing mortgage bonds in 2011. Nevertheless, it will be ready to introduce similar schemes if market conditions are appropriate.
Following the decision by the Monetary Council, on 8 February 2010 the MNB announced a programme to purchase up to HUF 100 billion of mortgage bonds at nominal value for the period to the end of 2010. The aim of the scheme was to achieve a sustained decline in the liquidity premia on forint-denominated mortgage bonds, in order to ease long-term forint funding conditions for banks. For this reason, the MNB planned to make most of its purchases in the primary market by encouraging the issuance of large series of bonds which are regularly traded in the secondary market and for which bid and ask quotes are readily available, thereby facilitating a material decline in liquidity premia.
However, the amounts purchased in the primary market at the initiative of domestic mortgage banks issuing mortgage bonds, constituting the backbone of the programme, were much smaller than expected and, therefore, the amount at disposal to purchase bonds under the scheme has been largely unused. Only one domestic mortgage bank offered to the MNB to purchase a new series issued in several tranches. The MNB purchased slightly more than HUF 7 billion of the series via six primary market auctions, which accounted for 20% of the amount purchased by investors outside the bank’s group.
The smaller part of the amount available was intended for purchases of mortgage bonds issued earlier, primarily in order to stimulate market demand for newly issued series with greater liquidity. Secondary market purchases have proceeded broadly as planned in the course of the year, with the MNB purchasing nearly HUF 30 billion of forint-denominated mortgage bonds in ten auctions held in the secondary market. Detailed data on the asset purchases in the primary and secondary markets can be accessed using the link below:
The MNB’s mortgage bond purchase scheme has had partial success. In the secondary market, the average spread of forint-denominated mortgage bond yields over yields on government securities fell from 150–200 basis points in 2009 to 80–150 basis points by the end of 2010, while turnover increased by more than 50%, excluding the amounts purchased by the MNB. However, no significant progress has been made in facilitating domestic banks’ access to long-term forint funding, due to the small quantity of bonds issued in the primary market. Lower-than-expected issuance of mortgage bonds by banks could be related in part to the modest increase in forint mortgage lending in 2010 and in part to the fact that banks obtained their forint funding required to finance their lending activities mainly by raising funds at shorter maturities than those of mortgage bonds.
According to available information, in particular on the maintenance of the moratorium on evictions and changes to the private pension fund system, current market conditions are unlikely to change considerably in the course of 2011 and, therefore, the MNB will discontinue its programme of mortgage bond purchases next year. The last auction to purchase mortgage bonds in the secondary market will be held on 8 December 2010. At the same time, domestic mortgage banks may offer to the MNB for purchase up to 20% of bond issues meeting the terms and conditions of the programme until 31 December 2010. The lending facility related to the mortgage bond series issued under the programme will continue to be available for counterparties until 16 March 2011.
The MNB will continue to monitor the development of forint mortgage lending and the domestic mortgage bond market, and considers it important to encourage long-term savings and improve long-term forint funding conditions for domestic banks. However, the MNB will consider setting up a new scheme for purchases of mortgage bonds if forint-denominated lending increases and banks are motivated that this increase is associated with a reduction in the maturity mismatch of their balance sheets.