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Market buys 1Y T-bonds as hedge

The Slovak foreign exchange and money market experienced another pretty calm period during the past two weeks. Very stable interest yields were quoted for tenors between one and six months. However, shorter periods experienced minor fluctuations driven by whether or not the banking sector was in surplus or lacked liquidity.
The central bank conducted another two auctions of state T-bonds. In the first, two-year bond auction organised on April 13, the ministry accepted all bids worth 1.74 billion Slovak crowns with an average yield of 15.999% (the maximum had been set by the ministry at 16% prior to the auction). In another, one-year state bond auction, the interest of investors increased to 2.38 billions crowns. The maximum interest was set at 15.8%, so the average yield was again slightly below, at 15.797%.

The Slovak foreign exchange and money market experienced another pretty calm period during the past two weeks. Very stable interest yields were quoted for tenors between one and six months. However, shorter periods experienced minor fluctuations driven by whether or not the banking sector was in surplus or lacked liquidity.

The central bank conducted another two auctions of state T-bonds. In the first, two-year bond auction organised on April 13, the ministry accepted all bids worth 1.74 billion Slovak crowns with an average yield of 15.999% (the maximum had been set by the ministry at 16% prior to the auction). In another, one-year state bond auction, the interest of investors increased to 2.38 billions crowns. The maximum interest was set at 15.8%, so the average yield was again slightly below, at 15.797%.

There are two reasons why the market has shown higher interest in buying T-bonds with one-year maturity. The one-year T-bonds can be used in the repo-operations of the central bank, where the commercial banks and investors can get cheaper funds. Also T-bonds with shorter maturities pose lower risk for investors, as the money market is liquid only up to 6 months, the secondary market is nearly illiquid and there is still a high risk that the government will fail to meet its planned budget criteria.

Some demand for Slovak currency from offshore investors appeared on the foreign exchange market after Finance Ministry officials declared their wish that the crown not be allowed to weaken more than 5% from current levels during the course of this year.

The Slovak crown has weakened around 4% against the euro so far this year, but has dropped around 14% against the dollar, as the euro itself has been falling against the surging dollar throughout 1999. As most corporate debt is unhedged in Slovakia, any further crown weakening may cause billions in unforeseen losses for Slovak companies.

Furthermore, any further fall in interest rates could have some negative affect on the crown as well, as much of the short-term debt of Slovak companies is due to be repaid this year and next.

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