Czechs launch 10-yr domestic note amid firm demand

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PRAGUE, April 25 (Reuters) - The Czech 10-year government bond drew solid demand from investors in Wednesday's inaugural auction despite bearish market sentiment and a yield coming in below benchmark euro zone levels.

The European Union member country's finance ministry sold 6.6 billion crowns ($320.4 million) worth of the 4.00 percent coupon government bond due April 2017 through the two-round auction.

In the first, competitive round, investors lodged bids equal to 2.1 times of the 5.89 billion crowns of bonds sold.

"The auction attracted reasonable demand given that Czech bonds are considered to be expensive relative to central European peers," said analysts at Informa Global Markets.

But the ministry retained additional bonds worth 2.5 billion crowns on its books, rejecting bids priced to yield more than 4.10 percent to keep a lid on its domestic borrowing costs.

The average auction yield reached 4.09 percent, giving a discount of about 9 basis points versus the equivalent euro zone benchmark debt .

Analysts said the auction result appeared to confirm the government was preparing to borrow abroad and thus was in no desparate need of funding despite a widening fiscal deficit, seen at more than 4 percent of gross domestic product in 2007.

The sovereign, rated 'A-' by Standard & Poor's and 'A1' by Moody's, has been considering tapping foreign markets with a Eurobond issue for at least 1 billion euros later this year.

"The message of this auction is not that demand for domestic bonds is low," said Daniel Kozel, debt portfolio manager at PPF Asset Management in Prague.

"The amount of bids was not a massive number but it looks quite solid given the negative backdrop of strong Ifo, a weaker crown and Thursday's central bank policy meeting," he added.

Euro zone government bond prices fell on Wednesday after the German Ifo business sentiment survey came in stronger than expected [GVD/EUR], which weighed on the Czech debt market.

The crown slid to a six-week low of 28.140 versus the euro , lowering foreign players' appetite to add Czech debt.

Some investors also worried central bank (CNB) policymakers could issue a hawkish statement after their monthly meeting on Thursday where analysts expect them to keep interest rates on hold for a seventh consecutive month.

Markets are betting the CNB will resume policy tightening by July to pre-empt inflation in the booming economy, following a total of 75 basis points worth of rate hikes between October 2005 and September 2006.

($1=20.60 Czech Crown)

Keywords: CZECH BONDS/