* Czech, Polish bond yields fall in successful auctions
* Demand for Czech bond weaker after Eurobond last week
* Polish bond bid well, weak CPI tames rate rise prospects
By Jana Mlcochova
PRAGUE, Sept 15 (Reuters) - Poland and the Czech Republic
sold 10-year bonds on Wednesday at lower yields than in previous
auctions, indicating investor confidence in emerging Europe
despite concerns about some more developed EU economies.
The two bond auctions, along with another successful debt
sale in Germany, underscored how investors are differentiating
between countries and asset classes to lock in higher returns in
a period of high market volatility.
Compared with countries like Portugal and Ireland, which are
struggling to push through painful austerity measures and manage
huge piles of debt, Poland and the Czech Republic have much
lower debt levels and their economies are recovering faster than
expected this year.
The new centre-right Czech government has set out an
ambitious fiscal consolidation plan, which is drawing investors
to Czech bonds despite low official interest rates.
The Czechs sold all 5 billion crowns ($263.3 million) worth
of benchmark nine-year bonds <CZ9YT=RR> <CZ1002471=> on offer on
Wednesday at an average yield of 3.143 percent, a drop of 67.5
basis points below the yield in a previous auction in July.
There were hardly any foreign bidders however as the Czech
Republic had just issued a Eurobond last week.
The asset swap spread was around 70 basis points, traders
said.
Poland also sold all 3.0 billion zlotys ($989.1 million) of
bonds on offer at its sale. Demand was 8.95 billion zlotys, for
a bid-to-cover ratio of 2.98 times.
Yields dropped 35 basis points from a June tender to 5.456
percent, while the demand -- much stronger than the Czech
auction after Prague's 2 billion euro Eurobond last week --
helped cut yields on the secondary market.
"The Polish auction obviously ended up much better than the
Czech one, where there was a surprisingly low demand as the
market appears saturated," said Dalimil Vyskovsky, an interest
rate dealer at Komercni Banka.
"In the Czech auction there were practically no foreign
bidders, which I think was because they have saturated
themselves in the Eurobond sale and skipped this auction."
The Czechs sold 2 billion euros in 10-year Eurobonds on
Sept. 6 at a margin of 105 basis points above mid swaps. They
twice cut the price guidance thanks to demand hitting more than
double the sold amount.
Prague enjoyed favourable financing terms relative to its
central and east European peers, thanks to its relatively low
debt at around 37 percent of gross domestic product this year
and plans to reduce its fiscal deficit to 3 percent of GDP in
2013.
YIELD COMPRESSION
Coinciding with a pick-up in global risk appetite for some
sectors, the Czech and Polish bond sales contrast with debt
trends elsewhere in Europe, where some governments have
struggled to keep yields from rising.
Although safe-haven Germany drew strong demand for its
10-year Bund on Wednesday, Portugal saw yields jump on 12-month
treasury bills to 3.369 percent, from 2.756 two weeks earlier.
And while the nine-year Irish spread over Bunds have climbed
121 basis points to 354 since June, the comparable Czech spread
has narrowed to 91 basis points, from 178.
Long-term Czech yields hit a record low on Friday, helped by
the government's ambitious fiscal consolidation agenda and plans
to cut its gross borrowing next year to 250-270 billion crowns
from 306 billion crowns under the previous plan.
In Poland, where officials say growth should exceed 3
percent in 2010, dealers said a lower-than-expected inflation
reading for August had also helped tame expectations for an
early interest rate hike, although markets still expect one by
the end of the year.
"I believe further gains on Polish bonds are possible
(thanks to) further falls in yields in Germany and the U.S.,
high market trading volumes, and inflation staying at
surprisingly low levels," a Warsaw dealer said.
"Supply plans for next year are also generally lower than we
had anticipated," he added.
(Reporting by Jana Mlcochova; Editing by Michael Winfrey and
Susan Fenton)
