Czechs Curb Koruna Bond Sale as Record-Low Yield Cuts Demand

The Czech government sold less than the maximum planned amount of debt in today’s auction as the lowest yield on record damped investor demand.

The country sold 5.2 billion koruna ($257 million) of 2018 fixed-rate notes and 2023 floating-rate debt, compared with the 4 billion koruna to 6 billion koruna target, data compiled by Bloomberg shows. The average accepted yield fell to an all-time low of 1.62 percent for the six-year note from 2.33 percent at its last offering on May 23, while bids for the security fell to 5 billion koruna from 8.4 billion koruna. Both maturities drew 10.5 billion koruna of orders, down from 16.7 billion koruna investors sought at the last domestic auction on July 18.

“Demand for Czech bonds seems to be somewhat lower than earlier this summer,” Dalimil Vyskovsky, head of fixed-income trading at Komercni Banka AS (KOMB) in Prague, said by phone yesterday. “The yields were falling for so long that some people felt it was overdone.”

The MSCI World Index of shares touched a three-month high yesterday and investors sold German and U.S. debt as better- than-expected economic data from Germany and the U.S. boosted optimism about the global recovery. Lured by the Czech program of budget-deficit cuts, credit ratings higher than for most euro members, and public debt at half the euro-area average, investors pushed the yields to all-time lows earlier this month.

‘Safe Haven’

The country has the highest credit ratings in central and eastern Europe, on par with Estonia. After the Baltic country, Czech credit-default swaps are the lowest in the region. Moody’s Investors Service rates the Czech Republic at the fifth-highest grade of A1, four steps above Italy and five above Spain.

The euro-area’s financial crisis sent investors to Czech bonds because of their “safe-haven status,” Jaime Reusche, an analyst at Moody’s in New York, said in a June interview.

The Czech parliament’s lower house approved a bill raising taxes a month ago, a key part of Prime Minister Petr Necas’s effort to cut the budget deficit to below the European Union’s limit of 3 percent of gross domestic product.

Funding costs for the country may drop even lower, and the curbed supply at today’s sale will help to maintain investor demand at future auctions, said Petr Pavelek, director of the Finance Ministry’s debt-management department, when asked why the government didn’t raise the maximum amount today.

“It is hard to estimate how much lower yields can drop,” he said in response to e-mailed questions from Bloomberg. “If the market had the impression that we want to opportunistically exploit the low rates” to boost borrowing, “the yields wouldn’t be where we see them today.”

The koruna gained to its strongest level in more than three months, trading up 0.2 percent to 24.967 per euro by 4:58 p.m. in Prague.

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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