Czech bonds flourish after dovish comments of CNB Board members yesterday. Both vice-governors, Singer and Niedermayer, admit that reasons for higher rates disappeared. They added that the next step might be in either direction. Nevertheless, we doubt that the rates could fall in the months to come, but flat rates in the first half 2006 is the most likely scenario. In consequence the yield curve drop significantly by 8 bps, and slight bullish flattening occurred. The spread over euro yields tighten further, because German Bunds were little changed. The spread is now even slightly negative (-4 bps) in 10-year segment. It was about a quarter of percentage points or 25 bps at the beginning of the year. Today the November retail sales may not affect the market. It came at 3.3 % y/y. Positive atmosphere and expectation of flat rates may push bonds slightly higher even today. 10-year spread of Czech and German yields.
(CSOB - Investment research)