Czech crown flat, yields up before 9-yr debt sale

...euro zone equivalents before fresh supply of long-term government bonds.

The crown was little changed on the day at 27.655 per euro by 1515 GMT, failing to receive any boost from a bigger than expected rise in the foreign trade surplus to 6.4 billion crowns [ID:nL09174055].

The finance ministry offers a 7 billion crown tranche of the 3.80 percent coupon 10-year bond in Wednesday's auction which market players expected to draw solid investor interest, despite a seven-month political and reform vacuum in the country. The bond will have nine years to maturity.

The note yielded 3.81/3.77 percent on the secondary market, nearly 20 basis points less than the euro zone counterpart.

"There will again be buyers of asset swaps at spread levels of around 10 basis points above swaps and higher," said Jan Poulik, head of capital markets at the largest Czech bank CSOB.

Some investors like to enter an asset swap transaction by swapping a bond's fixed-rate coupon to floating-rate payments to hedge out almost all of the interest-rate risk on the security.

"Otherwise, the offer will be sold easily. Seven billion is not that big a volume," Poulik added.

A new government led by Prime Minister Mirek Topolanek took office on Tuesday, but it lacked parliamentary support and analysts doubted a crisis sparked by an inconclusive election in June 2006 will end anytime soon [ID:nL09898915].

The crown has slid about 0.8 percent from a record high of 27.410 per euro reached in late December, weighed by profit repatriations by foreign investors in the country, which have boosted the current account deficit.

"The rising trade surplus is one of the key factors behind our long-term bullish view on the crown," said Miroslav Plojhar, chief economist at Citibank in Prague.

"However, the outlook in the next six months is to be negatively affected by a worsening of the current account, driven by profit repatriation, and low investment inflows which are unable to cover the current account gap," he added.

Separate data released on Tuesday showed inflation extended its uptick in December, but held well below the central bank's target, which boded well for market expectations of a pause in policy tightening in the coming few months [ID:nL09931969].

----------------- MARKET SNAPSHOT AT 1518 GMT ----------------- Crown/euro last deals at 27.660 (-0.10 pct) Crown/dollar at 21.260 bid (-0.10 pct)

5-year yield due Oct 2010 3.32 pct bid (+1 bps) 10-year yield due Jan 2016 3.75 pct bid (+2 bps)

5-yr CZK/EUR mid yield spread -63 bps (vs -64) 10-yr CZK/EUR mid yield spread -25 bps (vs -25)

Current levels versus prior domestic close at 1500 GMT ---------------------------------------------------------------

[PRAGUE/Reuters/Finance.cz]