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UPDATE 1-Czech government bonds to move to JPMorgan emerging debt indexes

(Adds market reaction, more details)

PRAGUE, Feb 23 (Reuters) - Czech crown-denominated government bonds will fall out of JPMorgan's indexes for developed market debt at the end of April and join its GBI-EM emerging markets benchmark, in a move the bank said was likely to boost demand.

JPM, which runs the most widely used emerging debt indexes, said the index shift, communicated to clients late on Wednesday, was decided after Czech per capita gross national income stayed under the threshold for developed markets for three years.

Czech bonds rallied on Thursday after weakening in the past month, a correction from yields hitting new lows in January. But demand remains high as investors bet the central bank will end this year a crown currency cap in place since 2013. While the Czech economy has expanded in recent years, helped by the weak crown policy, the strength of the dollar in that time means the country has fallen below the index ceiling as growth lagged the threshold in dollar terms.

JPM said the country would join the GBI-EM from April 28 with a weight of 3.3 percent, a step which will reduce the weightings of South Africa, Turkey and Poland.

The GBI-EM index is tracked by funds managing around $207 billion.

Czech yields fell on Thursday. The 10-year benchmark yield dropped 5 basis points to 0.623 percent. Yields are below zero on maturities up to three years and had been negative on paper up to six years before the correction this month.

JPM estimated the index move was likely to spur inflows of 3 billion to 4 billion euros in coming months.

The bank added that it did not expect the exit from developed market indexes to lead to "any meaningful outflows" given the bonds' small weighting of 0.17 percent.

It also said net inflows could be lower due to speculative investors using the increased flows as a chance to close out short euro/crown positions.

Investors have positioned to cash in on expected gains once the crown cap ends. But with billions of euros flowing into the market, analysts say the crown may not jump initially as a lack of counterparties could hold it back.

Analysts increasingly see a crown cap exit in the second quarter because of rising inflation. The bank has pledged to keep the cap throughout the first quarter.

JPMorgan said it expected the end of the cap coming at the bank's May 4 meeting.

Three euro-denominated Czech Republic bonds will also join the Euro EMBI Global index with a weighting of 6.9 percent. The country has no dollar bonds outstanding that can join the dollar-denominated EMBI Global.

(Reporting by Jason Hovet; Editing by Catherine Evans)

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