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Latvia Auctions Five-Year Bonds in First Such Sale Since September 2008
Latvia had its first successful auction of five-year bonds since being engulfed by the global financial crisis two years ago, signaling debt markets in the hardest-hit of the Baltic economies are returning to normal.
Latvia sold 12 million lati ($21.7 million) in five-year notes at an auction today, the Riga-based Treasury said on its website. The debt sold at an average yield of 5.691 percent and total demand for the paper, due Sept. 3, 2015, was 54.9 million lati. A tap auction will be held tomorrow for 3 million lati of five-year paper.
Latvia’s financial markets are showing signs of stabilization as the government draws on its $9.6 billion loan from the European Commission and the International Monetary Fund. The added lati liquidity has pushed down the country’s interbank lending rates to the lowest level on record, while T-bill rates are also declining. The $26 billion economy exited the European Union’s worst recession in the first quarter this year.
“Today we have seen that some investors are ready to give the government money at a lower price for five years than at the previous auction of three years at the beginning of August,” said Natalja Tocelovska, head of brokerage, equities and fixed income at SEB AB’s Latvian unit in Riga.
The cost of insuring against a Latvian default has also dropped. Credit default swaps on the country’s five-year debt traded at 347 basis points yesterday, compared with 548 at the beginning of the year. Latvia’s CDS trade lower than those on Irish debt, which yesterday soared to the highest since March last year at 352 basis points, according to data available on Bloomberg.
‘Test the Market’
Latvia’s government “will try to test the market to go for longer maturities” after today’s sale, Tocelovska said. Today’s auction is “a good sign” in case the government wants to go for a Eurobond sale in the future, she said.
The Treasury failed to sell any bills at an auction on June 3, 2009, amid tight liquidity in the lati market, fueling speculation the currency might be devalued. The central bank pegs the lats to the euro as part of the exchange rate mechanism required to enter Europe’s currency bloc. Latvia targets the switch in 2014.
The country’s economy is rebounding from last year’s 18 percent slump as manufacturing and exports advance. Gross domestic product grew a quarterly 0.3 percent in the first quarter and 0.1 percent in the second. Total output may contract about 2.5 percent for the year, according to estimates from the central bank.
The three-month Rigibor, the interbank lending rate, was 1.25 percent today, compared with a high of 29.8 percent on June 26, 2009.
To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net.
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