UPDATE 1-Successful Czech auction aids debt market recovery

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By Marek Petrus

PRAGUE, June 6 (Reuters) - The 10-year Czech government bond sale attracted unexpectedly hefty demand from investors on Wednesday, sparking a mild recovery in the domestic debt market after this month's deep losses.

The government sold 6.8 billion crowns worth of the 4 percent note due April 2017 through a two-step auction, including 0.8 billion worth of paper placed in the non-competitive, second round of bidding.

Demand rose to nearly 4 times the sold amount at the first, competitive auction stage, one of the strongest results ever reached in a Czech bond auction, from 2.4 times at the previous re-opening of the same bond on May 16.

"A nice surprise, given the prevaling bear market prior to the auction," said Pavel Sobisek, economist at UniCredit Markets & Investment Banking in Prague.

Czech debt is the most richly priced in central Europe, with local yields trading below the euro equivalents to reflect a wide gap between domestic policy rates and higher euro zone benchmarks and anticipation of euro adoption in the next decade.

The auction yield averaged 4.47 percent, coming in just below secondary market price quotations before bidding. It rose from 4.29 percent in the May sale, reflecting a fall in bond prices and a corresponding jump in their yields in past weeks.

Traders said the bond looked cheaply priced versus swaps, or contracts to exchange fixed and floating rates, which together with expectations of the government cutting back on domestic issuance due to a planned Eurobond offer helped spur demand.

"Demand partly stemmed from people covering short positions and partly from the banks' own books and investors who considered the paper cheap versus swaps," said Dalimil Vyskovsky, debt trader at Komercni Banka.

Bond yields on the secondary market gave back early gains and edged mostly lower, as prices regained ground, with the 4.00/2017 bond yield down 3 basis points on the day at 4.45/4.41 percent by 1400 GMT from 4.51/4.47 just before the bidding.

Last month's first interest rate hike by the central bank in 8 months, a weakening in the crown currency to 4-month lows against the euro and bearish sentiment in global debt markets have depressed the domestic bond markets in past weeks.

Long-term local currency debt yields have risen to their highest in 2.5 years this week. The crown traded at around 28.40 per euro on Wednesday afternoon, some 3.5 percent weaker from lifetime peaks reached late last year.

TABLES ON AUCTION RESULTS.......[ID:nPRA001332] [ID:nL06913496]

Keywords: CZECH BONDS/