Czech Yields May Rise on Larger Second-Half Borrowing

The Prague Stock Exchange
The government will sell as much as 52 billion koruna ($2.5 billion) in bonds and 75 billion koruna in T-bills in the three months ending Sept. 30. Photographer: Vladimir Weiss/Bloomberg

Czech bond yields may rise to the highest since October 2009 as the government ramps up debt sales to finance the budget deficit, according to Raiffeisenbank AS.

The yield on the benchmark koruna note due 2019 is poised to rise to as much as 4.6 percent by year-end, Michal Brozka, an economist at Raiffeisenbank, said in an interview. Komercni Banka AS, the Czech unit of Societe Generale SA, forecasts the yield will increase to 4.5 percent, the highest since February this year. Ceska Sporitelna AS, the Czech unit of Erste Group Bank AG, projects the yield at 4.25 percent to 4.3 percent.

Bonds fell yesterday, sending the yield on the benchmark note to a two-month high at 4.075 percent, after the government said it will almost double sales of local-currency debt in the third quarter from the previous three months. The plan to boost offerings overshadowed optimism following last week’s elections that the next Czech government will rein in the budget deficit.

“The positive influence of the elections will probably not outweigh the effects of the growing offer of bonds,” said Brozka at Raiffeisenbank in Prague. “Our medium-term recommendation is to sell Czech government bonds.”

The yield on the 2019 note fell to a one-week low on May 31 and the koruna had its biggest daily rally in three weeks after parties that pledged to reduce spending won the most votes in parliamentary elections ended on the weekend. The yield jumped today, rising 5 basis points to 4.123 percent, its highest in more than two months, at 5:20 p.m. in Prague.

Deficit Cuts

The government will sell as much as 52 billion koruna ($2.5 billion) in bonds and 75 billion koruna in T-bills in the three months ending Sept. 30, the Finance Ministry said in a statement yesterday. This compares with 32 billion koruna in bonds and 44 billion koruna in T-bills planned for the current quarter.

The country reduced sales in the second quarter after the Greek fiscal crisis drove up yields across Europe. It plans to raise a record 280 billion koruna this year to help plug a 163 billion koruna budget gap and repay outstanding debt. The government needs to cut the deficit to within the European Union’s limit of 3 percent of gross domestic product by 2013, down from 5.9 percent last year.

The Czech deficit widened to 95.4 billion koruna in the first five months of the year from 71.4 billion koruna in same period a year earlier as revenue declined while expenditures increased, the Finance Ministry said yesterday.

‘Slightly Worse’

“This year’s budget is doing slightly worse” than planned, Prague-based Ceska Sporitelna economist Martin Lobotka wrote in a report today. “The new government that is taking shape seems determined to reduce the deficit, but that will only fully show in the second half of 2011.”

Barclays Capital, Deutsche Bank AG and Ceska Sporitelna were hired in February to help the government sell at least 1 billion euros (1.2 billion) in foreign bonds. The country delayed the sale after rating downgrades in April for Greece, Portugal and Spain triggered a surge in borrowing costs.

“The issuance calendar for the third quarter surprised with a high volume,” Jan Vejmelek, a Prague-based Komercni Banka analyst, wrote in a report today. Plans to boost T-bill sales “may reflect the Finance Ministry’s effort to generate reserves in case unfavorable market conditions make the Eurobond sale impossible.”

Vejmelek said the reduced second-quarter issuance means the government will need to raise about 190 billion koruna, or 70 percent of this year’s borrowing needs, in the second half of the year. He said the government may sell 3 billion euros of foreign bonds.

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