Investors Snap Up Czech Bonds Despite Plans for Record Deficit

(Bloomberg) -- Investors scooped up Czech sovereign bonds in an auction as a combination of rising yields and safety are outweighing the government’s plan to increase the budget deficit this year.

The Finance Ministry on Wednesday sold a combined 17.75 billion koruna ($829 million) of three mostly shorter maturities, exceeding its target to raise as much as 15 billion koruna. While bids totaled almost twice the issued amount, the cost of financing on the two fixed-rate notes are significantly higher than in their previous offerings in January.

The auction was a test of investors’ confidence two days after Finance Minister Alena Schillerova proposed to raise the budget-gap ceiling for this year by 56% to 500 billion koruna. The country keeps extending its partial lockdown to contain one of Europe’s worst coronavirus outbreaks, but surplus bank liquidity and a relatively low debt level are ensuring strong demand for its bonds.

“The government is simply tapping cash piles held by Czech banks and investment funds that are further inflated by the generous fiscal stimulus,” Komercni Banka AS’s chief bond trader Dalimil Vyskovsky and strategist Frantisek Taborsky said by email.

They expect the actual budget shortfall around 400 billion koruna this year, even if Prime Minister Andrej Babis makes good on his pledges of record state investment to fuel economic recovery before October elections. While Czech bond yields have jumped the most in the European Union over the past six months, the country’s overall debt burden is projected to remain one of the lowest on the continent at 40.6% of gross domestic product.

“The deficits seem huge by local standards and the borrowing costs are on the rise,” Vyskovsky and Taborsky said. “But compared with the rest of the world, the Czech fiscal position is still very safe and stable.”

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