LONDON, Aug 27 (Reuters) - The government bonds of Slovakia,
the euro zone's most recent entrant, became the highest-yielding
in the currency bloc this month and analysts reckon this is set
to continue.
Without much fanfare, the country's barometer 10-year
government bond <SK10YT=RR> pipped Ireland's as the
highest-yielder versus the euro zone's benchmark German Bund
<EU10YT=RR>.
Lack of liquidity in a small capital market, competition
from covered bonds which are centre stage as the European
Central Bank mops them up, and turbulence that often greets new
euro zone entrants, have all conspired to give Slovak bonds a
hard time.
On Thursday, Slovak bonds yielded 162 basis points more than
Bunds on a bid price basis, while Irish 10-year gilts
<IE10YT=RR> yielded 155 bps over German paper.
It means the premium investors demand to hold Slovak
government bonds rather than safer haven Bunds is higher than
for any other euro zone member state and makes funding
relatively more expensive for the central European issuer.
This happened despite Slovakia's credit risk being lower
than that of Ireland.
According to data from CMA DataVision, a monitor of credit
default swaps (CDS), Slovakia's risk of defaulting within five
years is 6.2 percent versus Ireland's risk of 12.7 percent.
Ireland joined the euro in the first wave of entrants in January
1999.
"It's a curse that can befall sovereigns when they first
join the euro that rather than harmonise yields with German
Bunds, the yield spread stays or goes wider, as happened for
Portugal for a while after 1999," said Marc Ostwald, a bond
analyst at Monument Securities in London.
"It's doubly unlucky for Slovakia which joined at precisely
the time when bond yield spreads blew out in Europe at the
height of the global credit crisis," he added.
On Monday, Slovakia managed to issue 461 million euros of
four-year bonds -- by far the largest bond auction for the
sovereign since it joined the euro zone in January - as bidding
was frantic. []
But the same day Daniel Bytcanek, chief of Ardal, the Slovak
debt management agency which issued the bond, told Reuters he
considered the yields which the issuer accepted in the auction
at "up to 4 percent are totally at the edge of acceptable
levels". []
Bytcanek said yields demanded by banks should decline
because spreads (over Germany) of comparable debt in other euro
zone countries had declined but Slovakia's were still at levels
the agency considered too high.
Slovak yields have been falling since June, but more slowly
than other so-called peripheral debt yields such as Ireland's
amidst an equities rally, optimism about an end to recession in
parts of the euro zone, all of which led to an unwinding of safe
haven trades from German Bunds, favouring peripheral debt.
"There has been a surge of interest to buy peripheral debt
in the past few months which benefited the likes of Irish
gilts," said Ostwald, "but Germany wasn't the only loser in
this, so too was a less liquid market like Slovakia."
LIQUIDITY IS KEY FOR PERIPHERAL DEBT DEMAND
The average size of an Irish government bond now stands at
around 6-7 billion euros while for Slovakian bonds it is closer
to 2 billion euros.
Analysts said it can take years for a sovereign issuer to
develop the capital market depth and liquidity that can drive
yield spreads narrower.
"Slovakia is still pretty much beyond the radar of many
investors given the very tiny bond market relative to euro zone
peers," said David Schnautz, a bond analyst at Commerzbank in
Frankfurt.
"Negative spillover effects of the still not 100 percent
clear situation for the admission to the euro of some of
Slovakia's neighbours in central and eastern Europe may also
hinder Slovakian government bonds," he added.
Schnautz said the government bonds of smaller euro zone
countries may be facing competition from covered bonds.
"Unfortunately for Slovakia, the covered bonds arena is in
the limelight due to the European Central Bank which has been
buying up covered bonds since early July," he said.
The ECB reported earlier on Thursday it has bought a total
of nearly 8.5 billion euros of covered bonds under its
programme. []
"It is difficult to determine precisely what this huge yield
differential over the other euro-sovereign issuers is made up
of. Looking at the CDS for guidance, the credit risk of Slovakia
is lower than that of Ireland, closer to that of Italy," said
Peter Chatwell, a bond analyst at Calyon in London.
He said debt issuance in the summer attracts a liquidity
premium that issuers tend to have to pay.
"The liquidity premia which Slovakia suffered earlier this
week looks quite brutal, but the holiday season is still in full
swing...Had Slovakia been issuing the same bond a couple of
weeks later, they would have found demand at a lower yield," he
added.
(Reporting by George Matlock; Editing by Toby Chopra)
