Finance Ministry looks to uncomplicated retail bond sales

The first-ever bond issue aimed strictly at individual buyers and non-profit organizations may take place as soon as November this year, the Finance Ministry announced Aug 11.

Hoping to raise 40 billion Kč ($2.4 billion) in the next four years, the ministry anticipates around 100,000 individuals will purchase the bonds, which start at a 1,000 Kč and have maturity options of one, two, five and six years.

"It won't be a market mover," said Martin Kujal, CIO of Atlantik Asset Management, as government debt reaches into the hundreds of billions of crowns each year. However, "the idea is to really open up a new source for the government to sell debt and maybe, in the future, if it is successful, increase the amount of money raised," he said.

In the past, government bonds were sold through banks with significant fees tacked on.

"Banks discourage the sale of bonds to the public a little bit because it competes directly with term deposits, which they prefer to sell to the public," Kujal said.

Bonds issued in November will be sold at bank branches and investment intermediaries, but the Finance Ministry will have a say in the fees charged and is currently in talks with Česká spořitelna, ČSOB and Komerční banka regarding the bond sales.

The announcement of the sale comes as bond markets across Europe are hit by fears of debt contagion from embattled peripheral eurozone economies. What's more, the European Central Bank's decision to start buying up government bonds from Spain and Italy in order to stabilize yields has had quite the opposite effect on investor confidence.

Next Finance has been warning about the potential loss of investor confidence in bonds as a result of market turmoil in other parts of Europe, pointing to the price of insuring Czech government bonds that has significantly increased in the wake of the Greek crisis as more people seek to secure their investments.

Investment in government bonds relies heavily on the credibility of the economy, and investors are trying to figure out if the crown is "a safe haven," said Vladimír Pikora, chief economist at Next Finance. However, lower indebtedness levels, favorable bond ratings and plans to have a balanced budget by 2016 should help keep bonds attractive, he added.

"If another recession hits, I daresay the balanced budget will be delayed," Pikora said.

The overall strength of the domestic economy should keep demand high enough that bonds keep higher prices and lower yields.

"It's in the interest of finance markets," said Michal Brožka, an analyst at Raiffeisenbank. "At this point, it is positive that the demand for Czech government bonds is high, which means interest rates, or the yields, will be quite low for the bond buyers, so this is good for the government."

The government does not reveal the interest rate of the bonds until just before they are released.

Recent news from the Finance Ministry shows government bonds continue to attract foreign investors. JP Morgan Securities Limited participated in an auction Aug. 10 in which six-year bonds sold with an average yield of 2.877 percent, around 0.7 percent less than the same bond in April.

"I am very pleased that foreign investors are showing interest in the Czech state bonds," said Finance Minister Miroslav Kalousek. "It proves that, in the capital markets, even in times of turbulence, the Czech Republic is perceived as a stable country that is seeking to further consolidate public finances."

Even so, analysts said the majority of buyers will likely be domestic investors looking for a safe place to put their money.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com