The Czech Republic is challenging Switzerland for the world’s lowest yields, as speculative capital pours into local currency debt in anticipation of a boost for the koruna next summer, when the Czech National Bank is likely to remove a cap on the currency.
Czech sovereign two-year notes fell to a record low -0.94% on October 18, Bloomberg reports. That is 7bp below the equivalent Swiss benchmark. However, Czechia's hold on the top spot was short-lived, as the yield rose 2bp to -0.89% and the Swiss notes dropped 3bp to -0.97%.
After applying a cap of CZK27 to the euro in late 2013, Czech yields fell into negative territory at a primary auction for the first time ever in early September. Demand is being supported by the growing economy and excessive liquidity in the banking sector, but first and foremost by bets by foreign investors that the koruna will rise sharply when the central bank's cap on the currency is removed.
Monetary policymakers in Prague have spent months trying to talk down the speculation, but interventions have spiked since the summer. The CNB has recently reiterated that it will not abandon the cap until at least the end of the first half of 2017.
Regular comments regarding moves to soften any rise in the value of the koruna following the end of the official intervention regime are also being repeated. The CNB is keen to avert the risk of a huge surge in the koruna similar to that of the Swiss franc in early 2015 as the SNB removed its own currency cap.
Prague has said it plans to raise issuance in a bid to take advantage of low borrowing costs currently available. However, the finance ministry has slashed its offers in auctions this year as it chases negative yields.
Prague will offer up to CZK8bn in 2-year bonds at an auction on October 19, alongside 2023 and 2030 notes.
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