Czech Yields Fall to Record Low Before Bond Sale on Rate Cut
The Czech government’s borrowing costs tumbled to a record low before tomorrow’s debt sale as an unexpected interest-rate cut last week overshadowed concern that fiscal-austerity plans may be rejected.
The country will offer 6 billion koruna ($304 million) of fixed-rate securities maturing in September 2015 and floating- rate debt due in 2023, the Finance Ministry’s website shows. Yields on three-year notes fell two basis points to 0.31 percent by 3:46 p.m. in Prague, the lowest since Bloomberg began tracking the generic index in 1999. The 2015 paper was last sold on March 21 at a yield of 2.08 percent.
The central bank has lowered its benchmark rate three times since June to counter a second recession in three years, with the last cut a week ago to 0.05 percent, the European Union’s second-lowest after Denmark. Finance Minister Miroslav Kalousek said on Oct. 28 the government will have no reason to remain in office if it can’t pare the budget deficit. Parliament may start debating tax increases proposed by the administration tomorrow amid opposition from a group of ruling-coalition lawmakers.
“Low interest rates will probably keep shorter-term bond yields down for several quarters,” Marek Drimal, an economist at Komercni Banka AS (KOMB) in Prague, said by phone yesterday. “We expect longer-term yields to gradually rise because of political instability in the Czech Republic.”
Benchmark yields on 10-year koruna debt has retreated 169 basis points, or 1.69 percentage points, this year, cutting the premium over comparable German bunds to 47 basis points today, the least since April 2010. The spread on the three-year debt fell to a four-year low of 26 basis points today.
Premier Petr Necas has pledged to trim the 2013 deficit to less than the EU’s cap of 3 percent of gross domestic product for the first time since 2008. The cabinet, which is struggling to gain a majority backing for its austerity measures, is working on an alternative budget draft with additional spending curbs in case parliament rejects the higher taxes, Kalousek said yesterday.
“Given global risks and domestic fiscal developments, it is possible that the current level of Czech bond yields is overdone,” Michal Brozka, chief analyst at the Prague-based unit of Raiffeisen Bank International AG (RBI), wrote in e-mailed comments yesterday. Investors should sell koruna debt due in five years or more, the Austrian bank said in a Nov. 2 report.
Moody’s Investors Service rates the country at A1, its fifth-highest grade and the best in emerging Europe alongside Estonia. Czech debt is the cheapest to insure against non- payment in the region, with credit-default swaps at 79 basis points today, after touching 77 last week, the least since June 2011. That compares with 74 in Aaa-rated France and 88 in A2- ranked Poland.
The swaps, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
“A track record of policy and market credibility” allows investors to ignore the Czech political turmoil as “background noise,” Nicholas Spiro, the managing director of London-based Spiro Sovereign Strategy, said in an Oct. 29 phone interview.
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