UPDATE 1-Czechs boost Q2 local bond issues, spark sell-off

...

By Marek Petrus

PRAGUE, March 1 (Reuters) - The Czech Republic unveiled plans on Thursday to boost local currency government bond borrowing between April and June, lifting market yields on concerns over the market's capacity to digest the debt supply.

The finance ministry said it planned to raise 69 billion crowns ($3.23 billion) through medium-term and long-dated domestic bonds in the second quarter, including new 5-year, 10-year and 15-year benchmark issues.

The volume was well above expectations of about 40 billion crown supply by some domestic analysts, which led investors to sell the oustanding government bonds , boosting yields by up to 8 basis points across the board. "The number is not a catastrophe but it is bigger than almost everybody had expected, so the players' natural reaction was to sell," said Jan Poulik, head of debt capital markets at the largest Czech bank CSOB.

"It may signal that the ministry is not planning to issue a Eurobond in that quarter," he added.

The government has not ruled out returning to international debt markets in 2007 to curb local currency bond borrowing and help fund a deepening fiscal gap, seen widening to 4 percent of gross domestic product in 2007.

The European Union member country, rated 'A-' by Standard & Poor's, raised 2.5 billion euros through 10-year and 15-year benchmark Eurobond issues in 2004-2005 but did not tap the public foreign debt markets last year.

The second-quarter domestic issuance calendar includes a re-opening of the outstanding 3.25 percent bond maturing in 2009 in three auctions. Another seven auctions will be held to offer the three new benchmark issues.

The ministry offset the unexpected rise in bond supply with a cut in the offering of short-dated Treasury bills to 20 billion crowns, which some analysts said amounted to a mere half of the actual T-bill issuance in the same quarter a year ago.

"While the explanation means that the overall borrowing requirements of the state are not growing that rapidly, the announcement is still likely to put pressure on longer-dated yields," said Pavel Sobisek, economist at the Czech unit of Unicredit.

In its 2007 debt financing plan, the finance ministry says domestic issuance would only rise to the annual ceiling -- 152.8 billion crowns including debt rollovers -- if it refrains from a public foreign issue.

The plan left room to raise zero to 80 billion crown equivalent of foreign debt next year, which analysts have said created a big enough buffer for the government to scale back domestic issuance if need be to keep yields from increasing.