"Every non-systematic change in taxing has a negative effect on trading liquidity and hurts the market."
Vladimír Kukliš, Bond Portfolio Manager, ČSOB
Although the ministry announced earlier this year that such an amendment was in the pipeline, the move drew mixed reaction among bond market players. Vladimír Kukliš, Bond Portfolio Manager with ČSOB, said the market had already adjusted itself to the January announcement by going through a price dip that levelled off the additional taxing, meaning that though the regulation recently was announced, the market does not seem to be bothered at all.
But Rastislav Živor, a dealer with ING Barings, said the reaction is yet to come. "The previous tax differential between T-bonds and the money market is fading out," he said, explaining that T-bond yields should further converge with money market rates.
T-bond "Old Maid"
The MF claims that only the holder at maturity will have to incorporate the capital gain into the pre-tax income, whereas previous owners do not. Because of this feature, intermediaries do not feel held back from trading. "It certainly supports distribution to the final buyers," said Kukliš, who often acts as a broker.
However, this chance to play "Old Maid" with state bonds did not make traders and long-term investors feel any more confident about the provision. Kukliš said that insecurity resulting from taxing is a major factor influencing bond prices. "Every non systematic change in taxing has a negative effect on trading liquidity and hurts the market," he said.
Other market players said that too much fluctuation in bond yields may steer investors to other investment opportunities and decrease liquidity on the bond market. Živor even warned that the bond market may witness "hefty chaos."
The only buyers that need not be bothered are foreign investors, protected by double taxation treaties. Kukliš said that most foreign investors only hold the bonds for a relatively short time and rarely until maturity anyway.
Hold or sell?
Many bond investors have been forced to ponder legal ways to get around the extra tax by getting rid of the bonds before they mature. Insurance companies are major losers in this game, since they have been investing heavily into bonds. Most of them are still unclear about how to handle the new situation.
"I will have to come back and take a good look at it," said Július Hečko, financial director at Allianz. "[Given this situation], we have to reconsider our previous intention to increase the share of T-bonds in our portfolio."
The construction savings banks that also hold a portion of the already issued T-bonds are testing the waters as well. However, a source from a leading construction savings bank who requested anonymity said this bank has already decided to hold firmly to its strategy and continue to buy the bonds in large amounts, claiming that existing market restrictions leave precious little space to invest elsewhere.
Strengthening the image
In the end, market players say, the new regulation only corroborated the MF's image as a clumsy market regulator, a label that has dogged the ministry for years. "After putting a 15% tax burden on the coupon payments, I am not surprised by anything [anymore]," said Hečko, referring to the ministry's previous regulatory decision to tax the T-bonds' coupons.
An accountant with another insurance company, who requested anonymity, seconded. "I understand that the state budget needs financing; however, it is not fair when the taxation laws change everyday," she said.
But the ministry denied that filling the state coffers would be the driving force behind the proposal. "Obtaining finances for the state budget was not the reason behind the tax change," said a source with the ministry who requested anonymity. The source added that the regulation should tighten the loophole in current legislation that has been ambiguous in its handling of the buoyant capital gain.