Czech government bonds headed for their biggest monthly advance in three years as central-bank sales of the koruna fueled investor bets policy makers may impose negative interest rates.
Yields on the 10-year sovereign notes have fallen 37 basis points this month to 0.89 percent, the steepest retreat since July 2012 and cutting the premium over German bunds to 19 basis points from 49 in the period. The rate on two-year securities traded at a record-low minus 0.22 percent as of 12:56 p.m. in Prague.
Demand for the sovereign debt has surged since the Czech National Bank resumed interventions on July 17 to defend its 27-per-euro limit on koruna gains. The regulator signaled last week it may consider lowering borrowing costs to below zero from 0.05 percent if needed to help defend the exchange-rate pledge.
“With the koruna testing the floor, the market is pricing in a rising likelihood of negative interest rates, although we don’t think it’s an imminent scenario,” Dalimil Vyskovsky, the chief bond trader at Komercni Banka AS in Prague, said by e-mail. “At least some of the fresh liquidity from interventions will be parked in government bonds, providing further support.”
The CNB sold about 15 billion koruna ($609 million) in two weeks through July 28, according to estimates from the Czech unit of ING Groep NV published on Thursday.
A 200 bilion-koruna intervention in November 2013 flooded cash-rich local lenders with fresh liquidity, boosting demand for the sovereign debt.