Czech Yields Drop Before Bond Auction as Easing Signalled

The Czech Republic sold less bonds than the maximum planned in a third successive auction as a drop in yields in the past two days to near record lows pared demand.

The country raised 4.5 billion koruna ($237 million) from fixed-rate bonds maturing in 2021 and floating-rate notes due in 2017, compared with the 4 billion-koruna to 6 billion-koruna target, data compiled by Bloomberg shows. The average accepted yield was 2.31 percent, compared with a record-low 2.14 percent at the previous offering of the same maturity on Aug. 29. Bids shrank to 6.3 billion koruna from 10.6 billion koruna.

Czech bonds have rallied in the past two days, cutting the extra yield investors demand to hold 10-year koruna notes rather than comparable German bunds to a 15-month low yesterday, after Governor Miroslav Singer signaled that the central bank may step up monetary easing, including purchases of government bonds.

“I regard yesterday’s rally as significantly overdone,” Dalimil Vyskovsky, chief fixed-income trader at Komercni Banka AS in Prague, said by phone after the auction results were published. “The market may have overestimated the importance of Singer’s comment. The yields are low and bonds at the long end expensive, discouraging investors from buying more today.”

The koruna weakened 0.2 percent to 24.887 by 5:48 p.m. in Prague after depreciating 1.2 percent yesterday, the most since Feb. 22, according to data compiled by Bloomberg.

’Official Commitment’

Singer indicated the Czech National Bank’s steps may lower the yields on longer-maturity bonds, in an interview with Mlada Fronta Dnes newspaper yesterday. He said the bank, which cut its main interest rate to a record-low 0.5 percent in June, may “attack the long end of the yield curve” through asset buying and other stimulus measures. The economy shrank in the three months to June, its third consecutive quarterly contraction, according to data earlier this month.

“This may mean an official commitment to keep policy rates lower for longer” and shows “willingness to expand the central bank’s balance sheet and buy government securities,” Barclays Plc strategists led by Koon Chow wrote in a report yesterday. “We look for a 25 basis-point cut at the Sept. 27 meeting.”

Barclays recommended buying the 2021 debt as the yield may fall to 1.90 percent, according to the research note.

Default Swaps

The country has the fifth highest rating at A1 from Moody’s Investors Service, four steps above Italy and five above Spain. Czech bonds are the cheapest to insure with credit default swaps in emerging Europe. The contracts, which drop as perceptions of creditworthiness improve, slid less than one basis point today to 88, after reaching a 14-month low of 87 two days ago. That compares with 94 basis points for Aaa-rated France.

Czech yields, which reached all-time lows in August, jumped in the first two weeks of September as investors turned to higher-yielding assets on optimism the region’s financial crisis will be contained. The government sold the least debt this year at the last domestic auction two weeks ago as foreign investors cut demand on record-low yields and concern Premier Petr Necas’s plan to cut the budget deficit with higher taxes may fail.

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