Czech Shorter Yields Slump on Mounting Bets Koruna Cap Will End

  • Two-year bonds rise as euro-koruna forwards fall to 2016 low
  • Erste sees capital inflows, koruna interventions intensifying

Yields on Czech government bonds with shorter maturities fell the most in a year as speculation the central bank will scrap its cap on the koruna next year boosted demand for the currency.

The rate on two-year debt from the ex-communist nation fell nine basis points to a record-low minus 0.51 percent on Thursday as of 3:04 p.m. in Prague. The premium over comparable German bunds shrank to 13 basis points, an eight-month low. The rate on five-year securities slid four basis points to minus 0.20 percent.

Shorter-term Czech debt has been attracting mainly foreign buyers who expect to profit from koruna appreciation after policy makers said the economy is robust enough for them to remove their three-year-old limit at about 27 per euro around the middle of next year. On Thursday, investors in currency derivatives stepped up wagers on future appreciation to the highest level in a year.

“With mounting speculation by non-residents that the end of the exchange-rate commitment is nearing, we expect capital inflows will intensify through year-end,” analysts Jana Urbankova and Roman Sedmera at the Czech unit of Erste Group Bank AG said by e-mail. “The Czech National Bank will step into the market more vigorously in the final months of this year.”

The central bank has bought about $25 billion worth of foreign currencies since the intervention regime began in November 2013 to prevent a breach of the cap, flooding the market with excess koruna liquidity that reduces local funding costs. Returns on Czech assets remain high enough to attract investors fleeing the impact of the European Central Bank’s quantitative easing that pushes investors to hunt for yields.

Forward contracts, which reflect investors’ expectations for where the euro-koruna exchange rate will be 12 months from now, fell to 26.79 per euro, set for the lowest close since September 2015, from 26.77 yesterday and a peak of 27.1 as recently as this June.

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