Bondholders squeezed by negative yields in Switzerland, Germany and France are about to pay the Czech Republic to borrow their cash.
The rate on two-year debt denominated in koruna fell below zero for the first time last month and the government in Prague sold three-year notes at an average yield of 0.01 percent on March 25, with investors bidding for five times the amount sold.
The government is luring free cash thanks to the European Central Bank’s unprecedented monetary stimulus and Czech laws that compel domestic investors to buy the sovereign debt. Yields will drop further, according to Investicni Spolecnost Ceske Sporitelny AS, the nation’s second-biggest asset manager.
“Buying government bonds even at zero yields may still be profitable if the rate falls further,” Marcel Kostovski, a senior portfolio manager at ISCS, a unit of Erste Group Bank AG that oversees $8.4 billion, said by phone on Tuesday. “Domestic investors have very few alternatives.”
Czechs are benefiting from near-zero rates as the government faces 302 billion koruna ($12 billion) of local debt coming due this year and next, according to data compiled by Bloomberg. An expanding economy is allowing government to cut down borrowing, making Czech bonds scarcer at a time demand for them is rising as the ECB embarks on a 60 billion-euro ($65 billion) a month bond-buying spree.
The yield on two-year Czech notes was 0.01 percent as of 3:19 p.m. in Prague on Wednesday, compared with minus 0.19 percent in France, minus 0.28 percent in Germany and minus 0.78 percent in Switzerland, data compiled by Bloomberg show. Similar U.S. securities yield 0.52 percent.
In neighboring Poland, where the two-year rate is 1.58 percent, the government said last month it was exploring options for debt sales in foreign currencies either via “direct bond issues or synthetic transactions with the use of hedging” that may reduce its effective borrowing costs to or below zero.
The Czech economy will probably grow 2.4 percent this year from 2.03 percent in 2014, according to the median estimate in a Bloomberg survey of analysts.
Foreign demand will push yields below zero, but the move will probably be limited as domestic banks can deposit part of their cash with the central bank at a higher rate, said Ales Prandstetter, chief investment strategist at CSOB Asset Management AS. The KBC Groep NV unit in Prague had $7.4 billion in assets under management at the end of 2014, data from the Czech Capital Market Association show.
“The question is what will be the balance between Czech and foreign investors,” Prandstetter said by e-mail on April 3. “Yields may become slightly negative in the short term, but not in the longer term.”
ISCS’s Kostovski said that foreign buyers may accept zero or negative yields because they expect to make profit in the currency market when the Czech National Bank scraps its weak-koruna policy imposed in November 2013. Rate setters will allow the exchange rate to gain beyond the existing cap at 27 per euro between July next year and June 2017, according to 12 out of 13 economists surveyed by Bloomberg on Feb. 20-25.
Lowering the CNB’s main interest rate below zero would cut the appeal of parking cash at the central bank and boost demand for bonds, according to Dalimil Vyskovsky, chief fixed-income trader at Komercni Banka AS in Prague.
Speculation that rate setters may be considering a cut in the 0.05 percent benchmark rate, used for two-week deposits by commercial banks, mounted after the CNB said on April 3 it can’t rule out using other unconventional monetary-policy tools.
“Deposits with the CNB are not a cure-all” and “there’s always a risk, if not very high at the moment, that the CNB may cut the interest rate to negative,” Vyskovsky said by phone on Friday. “Zero is no limit for Czech sovereign yields.”