German Rates Lost as Czech Debt Sales Surge: East Europe Credit
The Czech Republic is preparing to sell the most bonds in more than seven years this month as borrowing costs rise, having missed rates that were below those in AAA rated Germany last month.
The government plans to borrow as much as 30 billion koruna ($1.5 billion) in three auctions, the first since Nov. 6, Finance Ministry data shows. The yield on five-year Czech notes rose to 12 basis points above similar German securities by 9:44 a.m. in Prague from two basis points below the European benchmark on Dec. 12, the biggest discount in five years.
The U.S. Federal Reserve’s plan to curb asset purchases is lifting yields worldwide just as Czech borrowing needs rise 29 percent this year to as much as 400 billion koruna. The five-year rate, at 0.99 percent, remains below the 2.31 percent it has averaged since 2009 and compares with 1.17 percent for similar French debt, according to data compiled by Bloomberg.
“The unique demand for Czech bonds we saw in November and early December is unlikely to be repeated any time soon,” Marek Drimal, an economist at Komercni Banka AS in Prague, said by phone yesterday. “While the country’s safe-haven appeal and higher banking-sector liquidity will prevent a major selloff, the outlook is clearly for yields to gradually increase.”
Czech five-year rates declined 30 basis points in November, the most in 16 months, after the central bank started selling koruna on Nov. 7, weakening the currency and flooding local lenders with extra liquidity that prompted bond buying. An interim government led by Prime Minister Jiri Rusnok didn’t take advantage of the slump in yields after it wrapped up the 2013 bond program with the Nov. 6 auction.
The Finance Ministry refrained from selling more bonds in 2013 even as funding costs fell after the interventions because an unplanned auction risked hurting its predictability for investors, Petr Pavelek, head of the ministry’s debt-management department, said in an interview in Prague on Dec. 16.
The Czech five-year yield will rise to 1.75 percent by Dec. 31, Komercni’s Drimal said. The rate on 10-year bonds will increase to 3.10 percent, from 2.50 percent, according to forecasts from Komercni, a unit of Societe Generale SA.
Auctions on Jan. 15, 22 and 29 will each offer 10 billion koruna of Czech bonds, the highest monthly supply since November 2006, the Finance Ministry’s website shows. The debt to be sold is due in 2016, 2021, 2022, 2023, 2028 and 2036.
“Our debt-management strategy is not opportunistic,” Deputy Finance Minister Jan Gregor said in e-mailed comments yesterday. “We strive for a long-term transparency.”
This month’s offer will be a test of market sentiment and determine the issuance strategy for the rest of the year, Pavelek said on Dec. 16. The Czechs may also sell around 2 billion euros ($2.7 billion) of foreign debt in 2014, he added.
Czech bond issuance will jump this year as maturing debt increases 26 percent to 136.4 billion koruna and the government plans to fuel growth with higher spending that will widen the budget deficit to 112 billion koruna, according to the debt-management strategy on the Finance Ministry’s website.
Last year’s deficit of 80.9 billion koruna undershot a 100 billion koruna target, the ministry said on Jan. 2. “The borrowing need for 2014 will be adjusted to reflect” the result, Gregor said. Czech debt is rated A1 by Moody’s Investors Service, on par with Israel and four steps below Germany.
Struggling to ward off deflation and fight record-long recession, the Czech National Bank knocked the koruna weaker in November by a record 5.9 percent against the euro when it bought $10.2 billion in foreign currencies. It said its interventions are aimed at preventing the koruna from “strengthening too much” beyond 27 per euro.
Equal to about 5 percent of gross domestic product, the flood of koruna into the market prompted cash-rich lenders to deposit more funds with the Czech central bank and buy state debt. The CNB has pledged to keep its intervention regime and hold the main interest rate at 0.05 percent until at least 2015.
Yields on shorter-dated Czech bonds will climb less because demand for the debt will be supported by low interest rates and the extra koruna liquidity, Martin Horak, a portfolio manager at CSOB Asset Management AS in Prague, said in an e-mail yesterday.
“The government should easily sell the planned amount, but the consensus is that longer-term bonds will come under some pressure later in 2014,” said Horak, who helps oversee $5.5 billion of fixed-income assets at the unit of KBC Groep NV. “Investors who can choose will prefer shorter maturities.”
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