Koruna Interventions Deepen Negative Yield in Czech Bond Auction

  • Average accepted yield on two-year debt drops to record -0.33%
  • ING sees `extremely low' funding costs while koruna cap lasts

Investors flush with cash from the Czech central bank’s currency interventions agreed to pay a record amount to hold two-year debt, prompting the government to sell more of the notes than planned at an auction.

The Finance Ministry on Wednesday issued 11 billion koruna ($436 million) of bonds maturing in November 2017, beating its 10 billion-koruna target, as the average accepted yield fell to minus 0.33 percent from minus 0.32 percent at the last offering a month ago. Investors bought another 4.1 billion koruna of Oct. 2023 and May 2030 bonds at 0.29 percent and 0.99 percent, respectively, according to data complied by Bloomberg.

Like top-rated Germany and the Netherlands, the government in Prague is enjoying negative funding costs on maturities of up to five years as the Czech National Bank’s foreign-currency purchases flood local banks with extra koruna liquidity. Some foreign investors are buying the bonds on speculation the Czech currency will appreciate once policy makers scrap the exchange-rate cap at around 27 per euro, which they imposed two years ago to avoid deflation.

“As long as the koruna floor is in place, the Finance Ministry will benefit from extremely low funding costs,” said Jakub Seidler, chief economist at ING Groep NV’s unit in Prague. The central bank probably sold “several billions” of koruna at the end of last week to prevent the currency from breaching the 27 mark and “this has added to the already strong demand for sovereign bonds at today’s auction,” he said.

The koruna continued to strengthen last week even after the central bank said it would probably delay the exit from the currency regime until the end of next year because the country’s economic recovery is failing to fuel price growth. The currency added 0.3 percent last week and traded little changed at 27.028 today as of 4:36 p.m. in Prague.

“Short yields may dip even deeper into negative territory next year, when we expect the CNB will have to step up interventions before it removes the currency pledge,” Seidler said.

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