Bondholders See No Gloom in Worst Slump: Poland Credit

Poland’s economy is set to show the weakest pace of expansion in three years, prompting investors to bet the central bank will keep cutting interest rates and prolong the biggest bond rally in a decade.

Gross domestic product grew 2 percent in 2012, compared with 4.3 percent in 2011, according to the median forecast from a Bloomberg survey of 33 economists before the data are published tomorrow. Forward-rate agreements signal 89 basis points in interest-rate cuts by October, while the extra yield on Polish two-year bonds over similar German notes fell to 296 basis points today, the least in more than four years.

The European Union’s fastest-growing economy since the onset of the global crisis in 2008 is slowing as rising unemployment stifles consumer spending and exports decline to the euro region, Poland’s biggest export market. While Governor Marek Belka said Jan. 9 that the central bank may pause after three consecutive rate cuts, Poland sold a record amount of zloty bonds at lowest-ever yields last week as investors expect more monetary stimulus.

“Weak economic activity should mean the rate-cutting cycle will continue,” Di Luo, a fixed-income strategist at HSBC Holdings Plc, said by phone from London on Jan. 25. “The Polish bond market could record decent returns this year with the central bank easing.”

Biggest Slump

Polish industrial output had its biggest slump in more than three years and retail sales fell the most since 2005 in December, reports showed this month, in a sign of deepening downturn. The current slowdown will be “deeper” and last “a little longer” than in 2009, when the economy grew by 1.6 percent, Jerzy Hausner, a member of the central bank’s Monetary Policy Council, said on Jan. 24.

The government has called on the central bank to cut more after it became the only monetary authority in the European Union to raise borrowing costs last year. Policy makers should demonstrate they’re capable of “quick reactions” to the economic slowdown, Prime Minister Donald Tusk told reporters in parliament on Jan. 25.

‘Protracted’ Downturn

Most central bankers “didn’t rule out” future rate cuts if upcoming data confirm a “protracted” downturn, minutes of the Jan. 9 meeting showed last week. Policy makers also agreed that the economic situation didn’t warrant cuts of more than quarter-point increments due to “risks” to inflation. Consumer-price growth reached 2.4 percent last month, falling below the bank’s 2.5 percent target for the first time since August 2010.

“The cautious tone adopted at the January meeting was premature,” Pasquale Diana, an economist at Morgan Stanley in London, said in a Jan. 25 e-mailed report. “The upcoming drop in inflation to around 1.5 percent by the second quarter will persuade swing voters to support more easing.”

The central bank will reduce the main rate to 3.5 percent in the second quarter, matching the record-low from 2009, according to the median forecast in a Bloomberg survey of 18 economists.

The zloty has weakened after the central bank began cutting interest rates. It’s retreated 3 percent against the euro since the Jan. 9 reduction and touched a five-month low today. It weakened 0.8 percent to 4.2025 per euro at 1:06 p.m. in Warsaw.

‘Selling Pressure’

“Monetary easing seems to weigh on the currency, and we may even approach a new all-time low in terms of the key interest rate,” Gunter Deuber, an emerging-market analyst at Raiffeisen Bank International AG (RBI) in Vienna, wrote in a Jan. 25 report. This “may trigger some selling pressure on Polish bonds going forward.”

The extra yield investors demand to hold Polish dollar- denominated bonds rather than U.S. Treasuries fell two basis points, or 0.02 percentage point, to 101 today, indexes compiled by JPMorgan Chase & Co. show. The spread over German euro- denominated bonds narrowed two basis points to 227, according to data compiled by Bloomberg.

The cost to insure Polish debt against non-payment for five years using credit-default swaps grew one basis point to 83, according to data compiled by Bloomberg. The swaps cost 76 basis points less than the average for 15 emerging-market peers in the Markit Itraxx SovX CEEMEA index, compared with 84 on Dec. 31.

The contracts, which decline as the perception of creditworthiness improves, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

‘Attractive’ Buy

The central bank will reduce the main interest rate to 3.25 percent from the current 4 percent, HSBC’s Luo said. Europe’s largest bank recommends investors buy longer-dated rather than short-term bonds and forecast total return of 6.3 percent this year, according to Luo. Polish domestic debt earned 13.9 percent last year, JPMorgan Chase indexes show.

“Everybody knows that the central bank is wrong and there is no reason to expect higher rates,” Dmitri Barinov, who helps manage the equivalent of $2.6 billion in emerging European debt at Union Investment Privatfonds in Frankfurt, said in an e- mailed response to questions on Jan. 25. “So 10-year bonds slightly below 4 percent are attractive.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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