Czech 10-year bonds rallied, pushing yields to a record low, after Standard & Poor’s said it may raise the country’s credit rating and the cabinet won parliamentary backing for its plan to halve the fiscal deficit.
The yield on the benchmark 5 percent koruna note due in April 2019 fell 5 basis points to 3.520 percent as of 4:45 p.m. in Prague, its lowest level since the security was first sold in March last year. The koruna weakened against the euro and Czech stocks slid as concern about Chinese and U.S. growth drove investors from riskier assets in emerging markets.
S&P said late yesterday it revised its outlook on the Czech long-term rating to “positive” from “stable” and expects upgrades if the new government follows through on pledges to cut spending, including an overhaul of the pension system. The country is rated A at S&P, the sixth-highest investment grade.
“The approval of the government’s policy statement and the possibility for a rating upgrade could support interest in Czech bonds,” Prague-based analysts led by Jan Cermak at CSOB AS, the Czech unit of KBC Groep NV, wrote in a report to clients today.
Prime Minister Petr Necas’s three-party coalition, which took office last month, won lawmakers’ backing in a vote of confidence late yesterday. It has pledged to reduce the budget gap to within the European Union limit of 3 percent of economic output by 2013 from 5.9 percent last year.
S&P changed its outlook because it expects the Czech government to find a way of reducing the impact of “age-related expenditures” on public finances within two years, the rating company’s statement said.
The cabinet approved a draft budget for next year with a target to slash the deficit to 135 billion koruna ($7 billion) from 163 billion koruna planned for this year, Necas said today.
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