Hungarian bond yields soar above 10% on cancelled debt auction

Hungarian bond yields soared above 10% yesterday after the government cancelled a bond swap auction, increasing fears the country will be the first in the EU to default on its debt.

The Hungarian government, led by Viktor Orban, has already fallen out with the EU and IMF over a law curbing the independence of the central bank. It has continued to defy euro leaders by calling off the bond auction to swap old debt for new.

The Budapest Business Journal reported the auction was called off despite adequate demand, according to the country's debt agency AKK, as the yields "did not make the exchange worthwhile for the state".

An auction for short-term debt went ahead this morning but it failed to raise the planned amount of 45bn forint. Only 35bn forint was sold in 12-month debt with a yield of 9.95%, this highest since April 2009.

The currency fell more than 1% to reach a record low against the euro.

Hungary needs to roll over nearly €5bn of external debt this year and in February is due to start repaying a loan from the IMF that saved the country from collapse in 2008, according to a report in the Telegraph.

Hungarian officials are set to meet the IMF and EU for rescue deal talks on 11 January, but the latest action has intensified fears a deal will not be reached.

Orban came to power in 2010 and has tightened many policies in the region, jeopardising aid talks with both bodies in the past, according to Reuters.

In December, Investment Week followed up a report in a national Hungarian newspaper which said 10% of Hungary's local bond market is owned by Franklin Templeton Investments.

The group's $61bn Templeton Global Bond fund, run by Michael Hasenstab, has a 4.3% exposure to Hungary, translating to $2.6bn, while the $494m Templeton Emerging Markets Bond fund has a 6.4% allocation, or $31m.

Updated at 10:58.