Foreign Holdings of Czech Bonds Rise on Koruna Appreciation Bets

Foreign holdings of Czech government bonds rose to a record last month despite yields tumbling to all-time lows in a sign that investors are betting on reaping currency gains after the central bank scraps its limit on koruna appreciation.

Non-residents owned 295 billion koruna ($11.9 billion) of local-currency sovereign notes as of Dec. 31, up 4.8 percent from the end of November and a 50 percent jump from a year earlier, the Finance Ministry said on its website on Friday. The foreign holdings represented 21.3 percent of the total domestic bonds. The yields on maturities of up to five years traded below zero the whole month after touching all-time lows at the beginning of December.

Czech debt has been attracting demand from abroad despite offering the world’s lowest yields after Switzerland, Japan, Germany and the Netherlands as investors speculate they’ll make profit on koruna gains, according to Jakub Seidler, the chief economist at ING Groep NV’s unit in Prague. Capital inflows are rising even as the central bank said there will be no reasons for major jump in the koruna and that it won’t allow “excessive” appreciation after it scraps its Swiss-style currency limit.

“Foreigners’ willingness to buy koruna assets with near-zero or negative returns shows they expect to make enough profit on the currency’s gains further down the road,” Seidler said. “Policy makers obviously have to say the exchange rate won’t appreciate much, but it’s really hard to imagine it wouldn’t.”

The central bank has repeatedly intervened by buying foreign currencies in the market since July to prevent the koruna from gaining beyond around 27 against the euro. The Czech currency has been stuck just above the intervention level for almost three months, trading at 27.03 per euro as of 10:16 a.m. in Prague. It has appreciated 2.7 percent over the past 12 months, the best performance among currencies in post-communist Europe.

The Czech National Bank reiterated after its December policy meeting that it will keep the limit in place at least until the second half of this year and that it will probably abolish it at around end-2016.

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