* Dealers concerned by scale, timing of finmin tap sales
* Some say risks skewing market, undermining liquidity
* IMF says should stick to announced volumes at tenders
* Dealers see problems, would prefer more transparency
By Jason Hovet
PRAGUE, March 31 (Reuters) - The Czech finance ministry has
knocked the domestic bond market off balance by offloading debt
to buyers outside of regular auctions, a practice that some
players say risks skewing prices and hampering interest in the
long-run.
Dealers view the so-called "tap sales" as unhelpful in the
market's struggle to claw its way back to the sort of liquidity
seen before 2008's financial turmoil. They say the sales hinder
trading, which the International Monetary Fund has said "remains
thin due to the opaqueness of public debt management".
The ministry sells most of its debt in regular auctions, but
over the past two years it has also unloaded bonds it keeps on
its own books in tap sales to primary dealers to cover around a
fifth of domestic issuance.
The strategy is not always clear to the local market players
who buy the bulk of government debt. They say it has sometimes
tilted the normal supply/demand balance, pushing prices lower
and benefitting buyers over sellers.
Seven dealers and local fund managers contacted by Reuters,
all of whom asked not to be named, said more transparency on tap
sales would be welcome, but they also said the ministry might be
better off without them.
"Certainly it kind of ruins the market, because if you don't
cover your needs on the market then you always have the option
to call the finance ministry," a Prague dealer said.
"If they let the market operate itself it would be much more
positive for them long-term because prices would be higher."
IMF SEES PROBLEM
Auction demand this year has been boosted by lower-than-
expected issuance, and yields are down about 2 percentage points
from a year ago amid a year-long rally in emerging market debt.
But the ministry has worked hard to keep a cap on yields at
auctions, selling less than the estimated volume in six sales
this year versus only three times in the second half of 2009. It
keeps the rest on its books and can instead use it for the tap
sales.
The IMF's March annual country report, without mentioning
the tap sales, recommended transparency on the market could be
improved by "adhering to the announced size of bond issuances,
to enable accurate pricing by dealers".
The Finance Ministry shrugged off the IMF report, saying it
was "not logical, fair and is not the heart of the matter."
It often calls market players for bids and only details its
past sales in quarterly reports. It has gradually reduced the
amount it sells as a percentage of issuance since a peak at the
end of 2008.
"Tap sales are offered exclusively to all primary dealers
with same conditions to all of them," the ministry said in an
email to Reuters.
"Tap sales work as small auctions of a 'best price wins'
type." It added other debt agencies, like Denmark's, use the
practice.
MARKET UNBALANCED
The Czechs are set to borrow a record gross 280 billion
crowns this year, a slight increase from 2009, including on
foreign markets and some from the European Investment Bank.
The country has had little trouble borrowing during the
financial crisis due to a debt load about half the European
Union average, when measured by percentage of economic output.
In 2009, the ministry sold 36 billion crowns in tap sales,
or 17.7 percent of overall domestic issuance, down from 21
percent in 2008 when it first started detailing the sales.
The practice peaked at 39.1 percent of issuance in the third
quarter 2008 just as the financial crisis started swirling --
virtually shutting central Europe's bond markets between October
2008 and March 2009 -- but gradually dropped to 10.1 percent of
total domestic issuance in the final quarter of 2009.
In six auctions this quarter, the ministry has sold 41.714
billion crowns in domestic bonds. Of that, 13 percent was bought
on its books, according to ministry data compiled by Reuters.
Some dealers said they have learned to live with the tap
sales and that the ministry seems to listen more to market
demand than in the past.
They also see few alternatives to help the market, which has
been plagued by dwindling liquidity in recent years and lower
foreign investor interest. But they still dislike the practice.
"The market is not very balanced," another dealer said. "If
you want to buy something you can call to the ministry; if you
need to sell something you have to go to the secondary market."
(Editing by Michael Winfrey)
