UPDATE 1-Czechs raise 2020 bond offer in strong demand

(Adds second-round auction result, background, market prices)

PRAGUE, Dec 6 (Reuters) - The Czech Republic raised the sale of the 3.75/2020 <CZ15YT=RR> <CZ1001317=> government bond on Wednesday as attractive pricing and growing expectations of a pause in central bank rate tightening lured investors into the offer.

The government sold 7.66 billion crowns ($363.4 million) worth of the paper in a two-step auction, after allocating 1.29 billion more than originally envisaged in the first, competitive round of bidding.

The average yield was 3.906 percent, and maximum yield just 0.5 basis points higher.

Investors wanted to buy paper worth exactly double the amount sold in the first auction stage. That boosted demand from an already solid 1.8 times the sold amount in the previous auction of the same note on Nov. 15.

"The paper yields very well above swaps, some 15 basis points, maybe 13 given the final average price," said Dalimil Vyskovsky, a trader at Komercni Banka.

The asset swap spread -- which investors earn for swapping the bond's fixed-rate coupon to floating-rate payments to hedge out almost all of the interest-rate risk -- was 13.5 basis points based on secondary market prices on Wednesday afternoon.

The secondary market yield has fallen to 8-month lows of 3.925/901 percent.

The auction followed the successful offering of a debut 30-year paper <CZ30YT=RR> last week, which was raised to 13.1 billion from an originally offered 8 billion.

Economic fundamentals have also been supportive for bonds. While public finances have deteriorated, inflation has been lower than expectations and the central bank is expected to lower its inflation forecast in its next update due in January.

Last month's firming in the crown to record highs against the euro <EURCZK=> has also helped improve the inflation outlook, leading the market to raise bets that rates could stay on hold into the first or even the second quarter of 2007. The key policy rate has held at 2.50 percent since a quarter point rise in September.

Its discount to the euro zone benchmark rate is set to widen to a record full percentage point on Thursday when markets are confident the European Central Bank will raise its rates by quarter of a point to 3.50 percent. ((Reporting by Jan Lopatka and Marek Petrus; Editing by Stephen Nisbet; prague.newsroom@reuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474))

($1=21.08 Czech Crown)

Keywords: CZECH BONDS/