The Czech National Bank (CNB) published an analysis supporting corporate bonds as a possible addition to its international reserves and a higher weighting for technology equities. Private assets offer potential investment benefits but present substantial implementation barriers. The analysis also recommends terminating all four externally managed mortgage-backed securities (MBS) mandates while retaining the option of flexible internal exposure.
Corporate bonds could modestly increase expected returns through additional credit and liquidity risk, without materially changing the reserves’ overall risk profile. Implementation could use existing infrastructure without additional staff. Technology indices historically outperformed the S&P 500 by 3 to 7 percentage points annually, but with higher volatility and little diversification benefit because of their overlap and correlation with broader equity markets. Portfolios tracking the Nasdaq-100 or S&P 500 Information Technology Sector indices could also be managed internally without increasing staffing. By contrast, private asset investment would require further legal and tax analysis and a dedicated team. Illiquidity, valuation difficulties and management fees complicate the investment case, and such holdings would most likely not qualify as official reserves under International Monetary Fund methodology.
The five-year MBS review found that the external management programme failed to deliver the expected performance relative to either the Bloomberg U.S. MBS Index benchmark or US Treasuries. Performance differences between passive and quasi-passive mandates were insufficient to justify retaining the arrangement. Rising and volatile interest rates contributed to the weak results by extending MBS duration and increasing sensitivity to rate changes. Rather than exclude MBS altogether, the review proposes allowing internal managers to adjust exposure through exchange-traded funds and derivatives according to valuations and expected compensation for risk.