State bond market moving in right direction for ČR, analysts say

Prague, Jan 29 (CTK) - Analysts polled by CTK see the development of the government bond market as positive at the start of this year.

Bond yields have grown slightly over increased market optimism but conditions are good for the Czech Republic, economists say.

Investors realise that the Finance Ministry has stocked up on liquidity and has no problems issuing new bonds. As a result, the Czech Republic still enjoys relatively low (debt) servicing costs, analysts said.

They expect that bond yields will be growing in the course of the year thanks to reviving economy.

Ten-year bonds, for instance, had yields at around 2 percent in January.

Bond yields have risen because Czech bonds are considered a safe harbour and if optimism is growing, investors are looking for a higher yield, said Komercni banka analyst Miroslav Frayer.

"No wonder that development of domestic yields is similar to German (bonds)," he added.

"Room for a fall of Czech government bonds has been used up following a rate cut by the (Czech National Bank) CNB and return of optimism to global financial markets," said Patria Finance chief economist David Marek.

The gap between yields of German and Czech bonds has decreased from 59 basis points at end-December to the current 37 points, said Marek.

"If there is something in the Czech economy that can be assessed positively in the previous period then it is the cost of financing of Czech government debt," said Raiffeisenbank analyst Michal Brozka.

"The Czech government has never seen such low financing costs," he said.

Besides long-term factors, lower risk aversion in Europe and Czech economic recession that resulted in a CNB rate cut to almost zero are behind the record-low yields of bonds, according to Brozka.

Frayer says that bond yields will be rising in the months to come as the euro zone and the Czech economy will be improving.

"This may come especially in the second half of the year and a marked increase of yields appears to be more likely towards the end of the year," said Frayer.

The Finance Ministry said early in January that state debt financing reserves doubled to around Kc140bn last year.

Based on the strategy of state debt financing and management, the ministry wants to borrow Kc230.7bn this year.

Net interest costs of state debt stood at Kc41.1bn last year, an annual drop of Kc3.9bn.