Czech government bonds extended their rally yesterday, as their yields slipped to fresh all-time lows. Coincidently, the yield of the 10Y Czech benchmark currently trades at the same level as the 10Y yield of the ESFS bond.
Although there is no evidence in data to confirm foreign investors’ improving demand (figures on non-residents holdings are delayed) the foreign buying seems to be the most logical explanation of the rally on the Czech bond market. The reallocation of assets, when portfolio investors who are withdrawing from the Spanish and Italian bond markets are moving some of their assets elsewhere, not only had a positive impact on countries such as Denmark and Sweden but also influenced Central Europe. In addition, after the ECB’s rate cut, yields from the bonds issued by the ‘safe’ countries of the eurozone have virtually fallen to zero, and this naturally made Czech government bonds even more attractive.
Another factor stimulating demand for Czech government bonds could be related to the (anticipated) development of official interest rates in those economies. After the recent move by the Czech National Bank, Czech official rates hit all-time lows. Although we do not believe that the CNB may cut its repo rate even lower (to 0.25%), we recognise the market arguments that other scenarios are possible.
Last but not least, Czech government bonds are faring so well, because of the tight supply side of the market. Beside relative tight budget policy, the Czech government succeeded in significantly pre-funding their (state budget) financing needs for 2012. The Czech MinFin has already covered 97% of its expected fullyear issuance of bonds. Should the 2012 issuance plan be strictly applied the MinFin will have to issue only around CZK 10bn in the rest of the year, which is a negligible amount for the market.