PRAGUE, Jan 11 (Reuters) - Demand soared to a record high for Czech zero coupon bonds due in 2018 at the country's first auction of the year on Wednesday, spurred by the looming end to the central bank's cap on the crown that has investors positioning for a jump in the currency.
Investor bids jumped to 32.3 billion crowns ($1.26 billion), the highest ever for any bond and three times the demand seen at the previous auction, in May last year. In February 2016, investors had bid 31.5 billion for the same bond.
The average yield sank deeper into negative territory, at -1.722 percent, at Wednesday's auction. The ministry sold 12.0 billion crowns of the paper.
Traders had expected a jump in demand as markets get ready for the central bank to end a more than three-year-old intervention regime keeping the crown weak. The bank's move could come as early as April.
After data on Tuesday showing inflation returned to the central bank's 2 percent target in December, crown forward rates firmed to the highest since the launch of interventions, with the 1-year rate at 26.50 to the euro.
"There was a big move the past few days on FX swap market, people are eager to cover the crowns received into bonds," Komercni Banka fixed income trader Dalimil Vyskovsky said.
The finance ministry also auctioned a variable rate bond due 2020 and a 0.95 percent coupon bond due 2030, selling 0.96 billion and 4.0 billion crowns, respectively.
Czech yields are the lowest in central Europe, with yields on papers up to six years below zero.
More analysts now expect the central bank to exit its crown regime in the second quarter.
The bank has made a "hard" commitment not to end the policy before then and said after its last meeting in December that it still saw a likely exit in the middle of 2017.
Market players expect the crown to jump several percent once the bank abandons the exchange rate cap that has kept the crown on the weak side of 27 to the euro since 2013.
$1 = 25.7040 Czech crowns Reporting by Jason Hovet; editing by Richard Lough