Yield Below Sweden Curbs Demand in Czech Government Bond AuctionKrystof Chamonikolas
The Czech Republic sold the minimum planned amount of new 3 1/2-year bonds at today’s auction as yields below higher-rated Sweden damped investor demand.
The country issued 3 billion koruna ($157 million) of notes due in July 2016, compared with a target of 3 billion koruna to 5 billion koruna, central bank data shows. Investors bid for 4.6 billion koruna of the debt, rated A1 at Moody’s Investors Service, and the average accepted yield was 0.63 percent. Top-rated Swedish bonds of the same maturity yield 1.1 percent.
Optimism that Europe will contain its economic crisis is pushing bondholders to lower-rated debt offering higher returns from Spain to Hungary. The Czech Finance Ministry today also sold 3.8 billion koruna of bonds maturing in 2022, near the top of the 2 billion koruna to 4 billion koruna plan. Bids totaled 8 billion koruna and the yield was 1.96 percent, compared with similar securities trading at 1.82 percent in Sweden and 1.51 percent in Germany, data compiled by Bloomberg show.
“Shorter Czech yields are no longer competitive,” Marek Drimal, an economist at Komercni Banka AS in Prague, said by phone after the auction. “Demand for the longer bond was solid because it still offers a nice yield premium.”
Czech bonds have the highest credit ratings in central and eastern Europe, on par with Estonia, and are the cheapest to insure with credit-default swaps. The Czech swaps fell one basis point today to 58, after touching a three-year low of 57 on Jan. 4. The contracts for France traded at 85 today.
The swaps, which drop 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.
The koruna gained less than 0.1 percent today to 25.599 per euro by 2:55 a.m. in Prague.
Demand for Czech debt surged after the government curbed sales in the last quarter of 2012 and said its gross borrowing this year will fall by about 25 percent to 230.7 billion koruna ($12.5 billion). The Finance Ministry doubled its cash reserve to about 140 billion koruna last year, a “sufficient cushion in the event of market instability,” Petr Pavelek, head of the ministry’s debt-management department, said on Dec. 12.
Lower-than-expected borrowing costs helped trim the central government’s budget deficit to 101 billion koruna last year compared with the target of 105 billion koruna, Finance Minister Miroslav Kalousek said on Jan. 3. That is ’’credit positive’’ and supports the perception of the Czech Republic as “a regional safe haven,” Moody’s analysts Jaime Reusche in New York and Dietmar Hornung in Frankfurt wrote in a Jan. 8 research note.
The A1 rating is Moody’s fifth-highest grade, four steps above Italy and five above Spain.
“The ministry is in a comfortable situation thanks to its high financing reserve,” Komercni Banka’s Drimal said. “Yields are likely to rise in future auctions as investors are leaving safe-haven bonds and hunting for higher returns elsewhere.”