Lowest Czech Yields Prompt Ministry to Mull Pre-Funding
Record low Czech bond yields are prompting the Finance Ministry to consider raising funding for 2013 as early as in September to help cushion the eastern European Union nation from the euro-region’s debt crisis.
The country raised 6 billion koruna ($292 million) of debt due in 2021 and 2017 yesterday as investors bid for almost three times the amount sold, central bank data show. The average accepted yield on the 2021 notes fell to a record-low 2.316 percent from 3.109 percent in June.
“In view of the uncertain developments in other countries, we significantly front-loaded financing in the first half, and in the rest of the year we’ll have to consider whether we should use such favorable rates to increase pre-financing for 2013,” Petr Pavelek, head of the ministry’s debt-management department in Prague, said in a telephone interview after the auction.
Koruna bonds are headed for their best monthly rally since August last year, helped by the July 17 decision by Moody’s Investors Service to affirm the country’s credit rating at the fifth-highest level of A1, four steps above Italy and five above Spain. Moody’s cited the government’s “continued austerity measures.” Rising demand from bondholders helped the country meet about 75 percent of its 2012 borrowing plans before yesterday’s auction, according to the Finance Ministry.
Investors are turning to emerging-market debt for higher returns after the EU’s financial crisis and concern that the global economy will slow sent government yields to record lows from the U.S. and Canada to Germany and France. The European Central Bank reduced its benchmark rate to a low of 0.75 percent and the deposit rate to zero on July 5 to rejuvenate the region’s economic growth.
“Investors leaving troubled countries don’t want to deposit with zero interest at the ECB, and therefore are looking for yield with reasonable risk,” Jan Vejmelek, chief economist at Komercni Banka AS (KOMB), Societe Generale SA’s Prague-based unit, said by phone yesterday. “We can see strong demand for Scandinavian, Polish and Czech bonds. Foreign investors also appreciate the Czech government’s low indebtedness.”
Public debt in the Czech Republic represents 44 percent of gross domestic product, below Poland at 55 percent and the euro area average of 92 percent, according to European Commission estimates for 2012 from May 11.
Czech bonds are cheaper to insure with credit-default swaps than notes from Aaa-rated France, data compiled by Bloomberg shows. Improving perceptions of creditworthiness cut the cost of Czech swaps 45 basis points this year to 129 today by 3:04 p.m. in Prague, compared with 166 for France. The swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
To Raiffeisen Bank International AG (RBI), Czech local-currency debt has gotten too expensive after the rally. The Austrian bank cut koruna bonds due in five years or more to sell from neutral on July 13, saying in a report the yields were “very low.”
Czech bonds fell today after CTK newswire reported that the government plans to cut the budget deficit at a slower pace than originally planned. The gap this year will be 3.2 percent of GDP instead of the previous estimate of 3 percent, CTK said, citing documents from a cabinet meeting today.
The lower house of parliament approved higher taxes on July 13, a part of Prime Minister Petr Necas’s effort to cut the deficit to 2.9 percent of GDP in 2013. Czech bond yields have fallen this year because investors view the country as a regional “safe haven,” Moody’s said in an e-mailed report.
“Contagion from the European debt crisis will be contained,” the ratings company said. “The sovereign’s key credit strengths serve as powerful buffers that insulate its credit profile from shocks that could otherwise undermine creditworthiness.”
Demand for Czech debt increased after the government curbed borrowing for the rest of the year, according to Pavelek. The amount sold yesterday at July’s only bond offering compares with 13.8 billion koruna investors bought in two auctions last month.
The country will meet its full 2012 funding target in September or October and use auctions in the rest of the year to help cover next year’s deficit, Pavelek said. The final amount the government will raise for 2013 will be decided “at the end of the summer,” he said.
Yesterday’s sale attracted “large demand from abroad,” with dealers based outside the country buying about 80 percent of the 3 billion koruna of the 2021 securities, according to Pavelek. The share of koruna-denominated government bonds held by non-residents rose to 12.8 percent in June, the highest this year, from 10.2 percent as of May 31, Pavelek said.
Benchmark 10-year koruna yields rose today 10 basis points to 2.52 percent after falling 60 basis points in the previous nine days to the lowest level since Bloomberg began tracking the generic data in 2000. The premium over German bunds rose to 129 basis points from an almost nine-month low of 121 yesterday, data compiled by Bloomberg shows.
The koruna weakened 0.2 percent to 25.330 per euro.
Necas’s cabinet yesterday survived a no-confidence vote in parliament, its fourth since taking power in 2010, called by the opposition over corruption allegations surrounding Finance Minister Miroslav Kalousek.
“The ministry should take advantage of the favorable terms to pre-finance for 2013,” said Komercni’s Vejmelek. “Borrowing costs are at record lows largely as a result of external factors, and it’s impossible to tell how long these will last or how quickly the market mood may turn around again.”
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