Czech bonds at the short end of the yield
curve lost heavily at the end of the week.
The move was initiated by the release of the
August inflation data. Consumer prices
increased by 0.2 % compared to the month
before (the market expected no increase),
while they grew by as much as 3.1 % in
year-on-year terms. After three months, the
August inflation moved back above the
target level (3.0%) of the Czech National
Bank.
As a result 3x6 FRA rates surged up by
more than 10 bps as market rate hike
expectations intensified. According the
current rates the market now clearly bets on
an October hike. So far we have assumed
that the CNB would deliver the next hike in
January 2007. Given the higher than
expected inflation and stable koruna we put
our view on a rate hike on hold and we
currently prepare a revision of our opinion.
This week has little domestic events.
Nevertheless, Friday’s figures bond
unfavourable figures might influence the
market even today. Hence, the bearish
flattening of the Czech curve might be visible
even today. Moreover Czech papers could
find similar support also on euro zone
markets and move yields up again.
(CSOB - Investment research)