Czech Yield Premium at 20-Year High Welcomed in ‘Sleepy’ Market

The yield premium on Czech benchmark sovereign bonds rose to the highest in two decades, awakened by a ramped-up government borrowing and expectations for monetary policy tightening.

The extra return on 10-year debt over comparable German bunds rose to 238 basis points on Thursday, exceeding a peak reached during the 2009 global financial crisis.

Czech Yield Premium at 20-Year High Welcomed in ‘Sleepy’ Market

Prime Minister Andrej Babis’s administration has been boosting debt-funded stimulus to fight the coronavirus crisis, a welcome development for fixed-income traders and analysts who have weathered limited bond supply and sluggish market activity for years. Meanwhile, resilient inflation and the central bank’s plans to start raising interest rates soon have added to the momentum in Czech yields, which are up by the most in the European Union this year.

“Heavy government issuance and investors taking bets on Czech monetary tightening ahead of the rest of Europe -- all that is making the traditionally sleepy bond market bigger and more vibrant,” said Frantisek Taborsky, a strategist at Komercni Banka AS in Prague.

A vast majority of Czech sovereign debt has traditionally been parked at local banks and pension funds that tend to hold them to maturity, leaving little room for shorter-term speculation.

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Rescue programs designed to fight one of the world’s deadliest coronavirus outbreaks, including a recent record income-tax cut, are driving up the state’s funding needs. The government now expects to exceed last year’s record budget shortfall in 2021 and remain deep in the red even when the economy recovers.

Yet the country’s public-debt burden is projected at 40.6% of gross domestic product by the end of this year, making it one of the lowest in the European Union. Meanwhile, demand for Czech bonds remains strong. At an auction on Wednesday, the government sold more bonds than planned and still rejected more than a half of all bids.

“Yields around 2% are still low in historical terms and won’t hamper the government’s ability to borrow,” Komercni Banka’s Taborsky said. “But relative to the euro area, and the Czech Republic’s solid credit profile, they are getting more attractive for investors.”

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