Polish Borrowing Costs to Fall at Auction on Demand

Poland’s borrowing costs will probably fall in today’s two-year bond auction as demand remains “high” for the sale of the least amount of the debt since May, according to PKO Bank Polski SA and Bank Millennium SA.

The government plans to offer between 2 billion zloty ($635 million) to 4 billion zloty of securities maturing in October 2012. The average yield will probably reach 4.67 percent, Bank Millennium predicts. PKO estimates the yield will range from 4.65 percent to 4.68 percent. That would be lower than 4.759 percent yield at the previous sale on Aug. 4. Results will be released at noon in Warsaw.

Poland sold 550.7 million zloty of 52-week Treasury bills at an auction this week with investor demand reaching 2.59 billion zloty. The average yield reached 3.939 percent, the lowest since June.

“The bonds should attract demand as the liquidity in the banking sector remains high as seen at the last auction of Treasury bills,” said Grzegorz Maliszewski, chief economist at Bank Millennium in Warsaw. “The recent weakening of the market may encourage some solid buying.”

Poland covered 77 percent of this year’s 196.8 billion zloty of gross borrowing needs through August and accumulated a cash reserve of about 32 billion zloty, Piotr Marczak, the head of the Finance Ministry’s debt department, said yesterday. The government may limit bond supply in the fourth quarter, Marczak said.

‘Excessive Liquidity’

“In the face of smaller supply of bills through the end of this year the factor of the excessive liquidity in the banking system should support the shorter end of the curve,” said Krzysztof Izdebski, fixed-income trader at PKO, Poland’s biggest lender by assets.

The central bank withdrew 83.8 billion zloty from the financial system in open-market operations on Aug. 27 through the sale of seven-day bills, according to National Bank of Poland data.

Policy makers voted to keep the seven-day reference rate at 3.5 percent for a 14th month in August as inflation slowed to a three-year low of 2 percent. Governor Marek Belka said last week inflation may exceed the central bank’s target of 2.5 percent this year, contradicting an earlier forecast.

Poland shouldn’t leave monetary policy “static for too long,” central banker Zyta Gilowska said yesterday, joining other policy makers in indicating interest rates may be increased later this year.

‘Significantly Slow’

A rate increase of as much as 75 basis points won’t “significantly slow” economic growth, policy maker Andrzej Bratkowski said in an interview with the PAP news agency this week. Anna Zielinska-Glebocka, another member of the council, said a motion on raising rates was already voted on this month.

Economic growth accelerated to an annual 3.5 percent in the second quarter after a 3 percent expansion in the first three months of the year, the Central Statistical Office said on Aug. 30.

“Prospects for rate increase are slowly beginning to weigh on the market so bids are not going to be aggressive,” said Millennium’s Maliszewski, who predicts the central bank will raise the main rate at its October meeting.

Traders have increased their bets for an increase in borrowing costs this year, according to money-market contracts. The three-month forward-rate agreement traded at 4.01 percent, or 30 basis points higher than the current three-month Warsaw Interbank Offered Rate at 3.71 percent, according to data compiled by Bloomberg. The so-called spread has widened from 20 basis points on Aug. 20.

The yield on the two-year bond has risen 18 basis points since Aug. 25. It traded little changed at 4.70 percent as of 9:26 a.m. in Warsaw.

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