Czech Republic: Value In Long-End Yields
With bad news out of Greece and other southern eurozone states casting a long shadow over much of Europe in recent months, finding relative value has become more difficult. Certainly, equities and currencies do not offer the same buying opportunities that they did during the Q209-Q309 rally.
However, a weak growth outlook on the back of poor Q409 numbers, fiscal concerns and lower interest rate expectations still present investors with the potential for gains. In recent weeks my colleagues at Business Monitor International have flagged up long-end treasuries in the fiscally better positioned states as looking particularly good, as investors’ expectations for longer term borrowing costs fall.
In Emerging Europe, the Czech Republic offers the best potential gains. While I think that the majority of short term interest rate expectations have been priced in, 5- and 10-year government paper looks attractive from both a technical and fundamental perspective. Technically, since my colleagues first flagged up the potential for long-end compression, yields on 10-year bonds have narrowed from 4.42% to 4.10%, and they are now approaching multi-year resistance at 4.00%.
Yields On Czech 10-Year Government Bonds, %
This should also see longer-end FRA contracts and interest rate swap (IRS) markets compress. I particularly like the 5-year IRS, which is testing resistance at 2.95%, a break of which would presage a move back to 2.50%, clocking up gains of 45bps.
March 8th, 2010 at 2:09 pm
Great post – nice to see Czech’s awesome fundamentals playing out in the markets now that the fiscal crisis in the PIGS is forcing investors to better differentiate European risk profiles. Wish the UK could have a few months of Jan Fischer as PM; maybe then we’d remain a first-world country…
Yes! You KNOW it!