ASW Tightening: Outlook for CZGBs in the Second Half of the Year

ASW tightening for the rest of the year

Given CZGBs supply dynamics, which are trending towards pre-Covid levels, and fiscal consolidation, which is a positive outlier among CEE peers, we expect the asset swap spread (ASW) to return to negative territory, a historically usual level for the spread vs the interest rate swap (IRS) curve. On the CZGBs side, we expect the government's consolidation package to take the main spotlight in late summer/early fall and later the MinFin to start focusing on CZGBs supply for next year, which should be positive for bonds. Moreover, on the IRS side, the market is already pricing in a near return of the Czech National Bank rate to the equilibrium level of 3% at this point, which should limit the further decline of the long-end in the IRS curve. Overall, we are positive on CZGBs and see a case for significant ASW tightening in the second half of the year.

 

10y CZGBs ASW (bp)

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