BUDAPEST/PRAGUE: Central European government bonds firmed on Wednesday as record demand at Prague's first auction this year drove yields deeper into negative territory and Poland's central bank held policy steady.
Demand for Czech zero-coupon bonds due in 2018 jumped to a 32.3 billion crowns ($1.26 billion). The average yield was set at an all-time low -1.722 percent.
Short-term Czech papers trade at yields well below safe-haven Bunds as investors expect the Czech central bank (CNB) to drop its cap on the crown currency strength by mid-2017. That could lead to a 3.5 percent surge of the crown by year-end according to a Reuters poll of analysts.
The CNB introduced the cap in late 2013 to fight deflation risks.
But inflation rose to its 2 percent target by December and recent Czech economic figures have been robust, including 7.9 percent annual surge in November retail sales.
The bank has more than doubled foreign exchange reserves since 2013, selling crowns to defend the cap. Fresh data showed 33.9 billion crown jump in its foreign asset in the last 10 days of December.
"The tension on markets is indicating the renewal of interest in the Czech currency at the end of December and the connected forex interventions by the CNB were just a warm-up to pressures that started in the new year," said Radomir Jac, chief economist of Generali CEE, the firm which gave the most accurate forecasts for regional currencies in Reuters polls last year.
"All indications are the CNB is now forced to intervene in large volumes..." he added.
Crown forward contracts have in part priced in a surge of the currency, but not fully, a Prague-based dealer said.
The six-month forward implied rate peaked at 26.5838 against the euro on Wednesday, the strongest level since late 2013.
Elsewhere, Poland's central bank kept interest rates on hold at record lows and will hold a news conference at 1500 GMT.
Analysts have said that a rate hike was as unlikely before 2018 even though inflation is on the rise in the European Union's eastern wing.
Monetary authorities and government budget makers in the region are still keeping policies loose to support economic growth and to help wages catch up with the much higher levels in Western Europe.
Polish government bond yields were steady or lower, with 2-year papers trading at 1.98 percent, down 4 basis points, and the zloty firmed 0.1 percent to 4.3708 against the euro by 0923 GMT.
Comments
Comments are closed for this article.