Investors Ignore Czech Deficit Quarrels to Scoop Up Koruna Bonds

Investors piled into Czech sovereign bonds as a combination of elevated returns and a relatively small debt burden overshadowed growing domestic pressure on the government to curb budget deficits.

The central European country on Wednesday sold 12.2 billion koruna ($586 million) of longer-dated notes, slightly more than planned. Bids totaled more than twice the amount and the yields dropped compared with May auctions.

The government is taking advantage of the strong demand to extend its debt-funded economic stimulus well beyond the expected recovery from the pandemic. While opposition parties, some central bankers and the budget watchdog are calling for fiscal restraint, the government argues that the country will stay one of the least-indebted in the European Union.

Investors Ignore Czech Deficit Quarrels to Scoop Up Koruna Bonds

“There is a pretty stark contrast between the domestic budget discussions and the country’s perceptions abroad,” said Frantisek Taborsky, a strategist at Komercni Banka AS in Prague. “Czechs are a very fiscally conservative nation, but international investors and rating agencies don’t seem to be worried at all. Compared with most other countries, our public finances remain sound.”

Reliable local demand and fresh inflows from abroad, attracted by hefty yield premiums, have turned longer-dated Czech bonds into the best performers in the EU this quarter. The rally continued even after the Finance Ministry announced a bigger-than-expected deficit plan for next year, prompting yet another warning from the National Fiscal Council.

After the auction of 2031, 2032 and 2040 notes on Wednesday, the government has covered about 72% of its full-year borrowing needs, according to Taborsky’s calculations. It has been also conducting the so-called switch operations that help the state repay early some of the debt that would otherwise come due next year.

“This shows how totally comfortable the Finance Ministry is and how much wiggle room they have in the rest of the year,” said Taborsky.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.