The New National Bond Will Yield Between 3.3 and 3.5 Percent

The new national bond is expected to yield slightly lower returns for citizens investing their money compared to last year’s bond, which attracted enormous interest and thus a significant subscription amount. Appearing on Croatian Television on Tuesday, Finance Minister Marko Primorac, when asked whether the new national bond would have a similar yield of 3.65 percent as the current one, stated that the interest rate would be ‘market-based’. In that case, it will be lower, as current stock market data shows, but not by much.

Soon even less

If the Ministry of Finance decides again to issue a two-year bond, the market yield for that maturity on the international market currently stands at 3.1 percent. The yield for that maturity has been declining since September last year, reaching 3.3 percent by the end of 2023. However, the two-year bond on the domestic market has a yield of about 3.6 percent. It should be noted that the domestic bond market is quite illiquid, so this amount should be taken with a ‘grain of salt’.

If the yield is interpolated between the one-year and three-year Croatian bonds issued on the foreign market (eurobond), the yield on a potentially new issuance of the two-year national bond is around 3.5 percent according to current market conditions, explains Niko Maričić, head of the asset management department at InterCapital Asset Management. – My expectations regarding the yield on the new national bond are that it will range somewhere between 3.3 and 3.5 percent – says Maričić.

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Niko Maričić, head of the asset management department at InterCapital Asset Management

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– It is important to emphasize that future yields on bonds are likely to be even lower due to the European Central Bank’s policy, which has announced the normalization of monetary policy, i.e., the transition from restrictive to expansive monetary policy. This is also indicated by the movement of interest rates on the last national treasury bill, which had a three-month issuance yield of 3.75 percent and a one-year yield of 3.65 percent. Thus, the Ministry of Finance signals that it expects cuts in the ECB’s key interest rates – says Maričić.

Interest Remains Strong

Despite the lower yield, the new national bond should still offer significantly better returns than bank deposits. Data from the Croatian National Bank (HNB) shows that the interest rate on one-year deposits in large banks still does not exceed one percent. The highest interest rate is offered by the state-owned Croatia Bank at 2.90 percent, followed by Agram Bank at 2.80 percent and Partner Bank at a slightly lower 2.75 percent.

Accordingly, it is not surprising that citizens’ interest in government debt remains strong. The latest treasury bill, which closed for subscription on Monday, was subscribed by another 37,000 citizens who invested nearly 930 million euros. Of that, 221 million euros pertains to the three-month ‘treasury bill’, while 708 million euros is for the treasury bill with a one-year maturity. Those opting for the shorter maturity will receive an annual yield of 3.75 percent, while those for one year will receive 3.65 percent.

When institutional investors’ subscriptions are added, the state sold this national tranche of ‘treasury bills’ for 1.05 billion euros. Recall that in the first national bond issued last spring, citizens invested 1.35 billion euros. Soon, those who still hold it and have not sold it through the Zagreb Stock Exchange will receive their first interest payment. According to announcements, the payment is due on March 8.

Regarding refinancing needs, the state has somewhat higher needs this year than last, primarily due to a larger planned deficit compared to 2023. During 2024, it will have to pay slightly more than 4.5 billion euros for maturing bonds and loans. This is less than last year when it needed to repay 5.3 billion euros, but the projected deficit of the state budget increases from 1.6 billion according to the 2023 plan to four billion euros this year.