The Czech National Bank (ČNB) has expanded its investment mandate to include corporate bonds, aiming to diversify its massive foreign exchange reserves.
As of late September, these reserves reached nearly 3,9 bilionu korun, ranking among the largest globally relative to the size of the national economy.
The bank’s governing board approved the inclusion of corporate debt as a permitted asset class in April, with initial acquisitions occurring during the third quarter of this year. While the central bank is not a pioneer in this strategy—approximately four out of ten central banks globally hold corporate bonds—the ČNB previously bypassed this asset class in favor of equities to achieve diversification, Seznam Zprávy reported.
The primary motivation for the shift is the potential for higher long-term returns compared to government bonds. Central bank analysis suggests that high-quality corporate debt has historically outperformed state bonds by approximately one percentage point annually over the last three decades.
"Our predecessors did not see such a strong diversification effect with corporate bonds," Jan Kubíček, a member of the ČNB bank board, told Seznam Zprávy. "We decided that they could be a suitable addition to the bond portion of the portfolio. That certain excess yield over government bonds is actually the main reason."
Currently, however, the bank is exercising caution. Because the "excess yield" of corporate bonds over comparable government debt is historically low, the bank has not issued a mandate for aggressive buying. Traders have been granted the flexibility to decide if and when to purchase these assets based on market conditions.
To manage risk and minimize administrative complexity, the ČNB is not selecting individual company bonds. Instead, the bank is investing indirectly through exchange-traded funds (ETFs) that track broad bond indices, currently focused on the U.S. market.
This approach allows the bank to gain exposure to hundreds or thousands of different issues simultaneously, spreading risk without the need to manage individual securities. The bank has mandated that these ETFs must only contain bonds within the "investment grade" category. If a company’s rating drops to speculative status, the index-based structure of the ETF automatically removes the security from the portfolio.
The introduction of corporate bonds coincides with a reduction in the bank’s holdings of mortgage-backed securities (MBS). The ČNB began investing in these products in 2019, but recent performance failed to meet internal expectations.
The remaining portion will be transitioned from external management to internal management via ETFs. According to Kubíček, this shift addresses the dual challenges of high external management fees and a market environment that has proven less favorable for mortgage-linked products than initially anticipated.
The ČNB has not set a specific target for corporate bond holdings, instead establishing a ceiling. Corporate bonds and MBS combined are capped at a maximum of 10% of the total bond portfolio.
Regarding the bank’s broader strategy, the ČNB continues to maintain its long-term goal of holding approximately 30% of its reserves in equities. The bank is steadily increasing its gold reserves, which currently stand at roughly 90 tons, with a target to exceed 100 tons during the next year.
While the bank explored private equity and venture capital, it ultimately rejected these classes due to concerns regarding low liquidity and the difficulty of exiting positions quickly.