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Politics, yields hurting bonds

A market appetite for mid-term government securities which has been waning since the start of the year hit a new low July 2 with the failure of an auction of state bonds with a two year maturity, dealers said.
The issue, which attracted only 140 million crowns ($2.8 million) in bids, while the ministry had been looking to raise two billion crowns, came only a week after an auction of similar maturity bonds had pulled in bids far below government expectations: 680 million crowns against a planned one billion.
In both cases the government - which uses its securities to finance state debt, including the redemption of previously issued bonds - set the papers' interest rates at just below 8%. The Finance Ministry has said that it will not offer anything higher, fearing the consequences to its financing plans if it has to pay back higher yields.

A market appetite for mid-term government securities which has been waning since the start of the year hit a new low July 2 with the failure of an auction of state bonds with a two year maturity, dealers said.

The issue, which attracted only 140 million crowns ($2.8 million) in bids, while the ministry had been looking to raise two billion crowns, came only a week after an auction of similar maturity bonds had pulled in bids far below government expectations: 680 million crowns against a planned one billion.

In both cases the government - which uses its securities to finance state debt, including the redemption of previously issued bonds - set the papers' interest rates at just below 8%. The Finance Ministry has said that it will not offer anything higher, fearing the consequences to its financing plans if it has to pay back higher yields.

Some dealers said after the auction that the government could soon run into problems with debt financing if market demand for bonds with maturities between two and five years fails to pick up soon.

However, the Finance Ministry announced July 9 that it could use the option of launching a large issue of eurobonds if it needs to raise finances, quelling any such fears. Issues of bonds in foreign currency are much larger than those in domestic currency - as much as 21 billion crowns ($420 million) compared to two or three billion ($40-60 million) - making them far more attractive to foreign investors despite lower yields.

"The government should be able to carry out its finance plans anyway, but in case of an emergency it has this option to issue the eurobonds," said Martin Koska, trader at ING Bank in Bratislava.

Pre-election jitters

Dealers at home and abroad warned at the start of this year that investors were already beginning to show signs of nervousness over the outcome of the September 2001 elections, and that because of this, demand for mid-term bonds could be affected. They said that political uncertainty over the make-up of the next government and its economic policy - which could adversely affect interest rates on state securities - was putting many investors off government papers.

The situation has not changed since then, and recent threats by the Hungarian Coalition Party (SMK) to leave the government coalition have compounded the nervousness surrounding longer-term bond buys in Slovakia, said Jaroslav Vitazka, assistant portfolio manager at Schroders in London.

This has been compounded by an unwillingness on the part of domestic banks to take the 8% interest rate on offer on the bonds, and the Finance Ministry's reluctance to move upwards from its offered yield.

"The commercial banks and the Finance Ministry are playing a waiting game, watching to see what move the other will make," said Pavel Habšuda, dealer at brokerage house Slávia Capital.

However, the Finance Ministry has said it remains confident of success with longer term bond issues. Addressing growing dealer concerns over the issues of mid-term securities it said at the end of June that Slovakia's continuing success in EU accession negotiations - Bratislava is now on a par in terms of pre-accession legislative harmonisation with front-runners for membership to the Union, such as Poland and the Czech Republic - was a sign for investors that Slovak securities were still an attractive long-term proposition.

But domestic market analysts say that while the government may be able to attract buyers for one-year papers with an 8% interest rate, it must raise that same ceiling on mid term bonds if it is to make them attractive and allow the Finance Ministry to stave off potential financing problems.

"The government needs to issue [mid-term] securities with a bigger yield and less frequently, not just every few weeks as now, to try and raise interest in them," said Koska.

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