* New 10-year bond auction on March 18
* First fixed-coupon issue since October, seen as test
* Dealers see yields above secondary market
By Jason Hovet
PRAGUE, March 16 (Reuters) - The Czech Republic will have to
accept higher yields to sell its first fixed-rated bonds since
October in an auction on Wednesday, dealers say, as it tries to
prod its still largely paralysed bond market back into life.
The Czechs have seen steady demand for floating-rate bonds
this year, but yields have grown due to the rising cost of risk
in central and eastern Europe and with rising competition at
European bond auctions as governments borrow record amounts.
The average yield at an eight-year floater <CZ1002331=>
auction earlier this month rose to 147 basis points over the
6-month interbank PRIBOR rate of 2.63 percent, with the highest
accepted yield widening to 175 basis points. []
"I don't think investors will be willing to buy this at an
improved (higher) price," a local fixed-income fund manager
said. "They will try to push for a nice spread again. And the
Finance Ministry probably needs to sell something."
The ministry plans to auction 8 billion crowns of a new
10-year bond with a 5 percent coupon on Wednesday <CZ1002471=>.
It will be the first fixed rate issue by Prague since last
autumn when the escalating financial crisis swept through
central Europe and Czech and other regional bond markets seized
up.
The ministry will follow that with three more planned
auctions by the end of April: one new 3-year bond and two
re-opened issues.
The current Czech 10-year government bond, with a 4.6
percent coupon <CZ10YT=RR>, was quoted at 95.77/98.27 on Monday,
yielding 5.175/4.830 percent.
Its asset swap spread has risen to 151 basis points from 105
bps at the start of the year, according to Reuters data.
Dealers said yields would likely rise more in upcoming
auctions, but some said the ministry may cut bids off at around
200 basis points over swaps.
"The (yield) will be much higher than the market suggests...
there is still a lack of interest (from clients) so far," a bond
dealer said.
The dealer said the ministry had likely secured buyers among
some investors to secure success of the auction.
Hungary, which reached out for a $25 billion lifeline from
the International Monetary Fund and European Union last year,
held its first government bond auctions in February but has
delayed more auctions due to market volatility.
Worries over the health of central Europe's banks and some
countries' foreign credit exposure hit the region last month,
pushing credit default swaps (CDS) to record highs.
The Czechs halted a euro-denominated debt issue in February
due to the rising CDS price and risks the higher pricing posed
to local markets. The ministry has also started looking at plans
to raise up to 140 billion crowns in retail bond issues over
several years.
The public deficit is expected to treble this year to 4
percent of gross domestic product, lifted also by an anti-crisis
package unveiled last month by the government.
"Of course they need to finance and will have to accept
higher pricing," said Anne-Francoise Bluher, fixed income
analyst at Komercni Banka. "It will be interesting to watch how
strong demand is and the pricing."
(Editing by Stephen Nisbet)
