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Czech bond prices continued to rise last week

15.3.2005 8:40

The yield curve went down; the greatest variations occurred at the short end of the yield curve. The situation on developed European markets was completely different. Bond prices fell there and thus the negative spread between the yields of Czech and German bonds again widened. The spread is already greater than 25 bps for bonds maturing in 2009. The anticipation of a rate cut is having the greatest effect on the Czech market. This anticipation was encouraged by the minutes of February’s CNB Board meeting, the statement from Board Member Řežábek and, last but not least, the situation on the forex market.

The minutes of February’s CNB Board meeting indicated that the Board almost changed rates at this meeting because only a small majority was in favour of leaving rates unchanged: four of the seven Members voted to leave rates unchanged. Risks are currently accumulating on the antiinflationary side, according to the minutes of the meeting. There is no need to put off a rate change in order to confirm this development. CNB Board Member Řežábek later said that, according to him, there was room for a rate cut and the Board might discuss a cut greater than a 25 bps at its meeting in March. Czech Eurobonds maturing in 2020 with a 4.125% coupon were sold on Friday. The yield was set at 10 bps above 15Y swaps. Although demand was high, the Ministry of Finance decided not to issue Eurobonds for more than the planned EUR 1.0 bn this year.

This week’s events include Tuesday’s release of February’s producer price index; we expect that its rise continued to slow down. The only auction in March will be held on Wednesday; the Ministry of Finance will supply CZK 5 bn of the SD 3.80/2009 bond for CZK 4 bn overall. Given the current market situation, the auction will certainly be in demand. Don’t forget, however, that the Ministry of Finance will supply bonds of this maturity for an additional CZK 16 bn in May and June. Bond prices should also rise slightly this week. The market takes the expected 25 bps rate cut as granted. We cannot rule out that rates will be cut even more. However, the CNB Board meeting is not going to be held until the last day of March.

(CSOB - Investment research)

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