German Contagion Afflicts East as Poland Cowers in Bond Auction

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Poland’s government is taking shelter from the global bond rout by minimizing borrowing from foreigners.

The Finance Ministry opted against selling longer-dated notes in today’s 4.2 billion-zloty ($1.15 billion) debt auction, offering instead two- and five-year maturities that are more popular with local banks. Polish 10-year yields have jumped to the highest compared with two-year notes since February 2014 on Wednesday.

Poland’s soaring longer-term borrowing costs show the fallout from benchmark German 10-year bund yields topping 1 percent for the first time since September. Investors are applying extra caution in Poland on speculation President-elect Andrzej Duda’s victory last month points to a swing in the parliamentary vote this year to a party favoring additional taxes on banks and a lower retirement age.

“The structure of the sale shows that demand from foreign investors was probably very low,” Miroslaw Budzicki, a fixed-income strategist at Poland’s largest lender PKO Bank Polski SA, said by phone after the auction’s results were released. “The positive element is that they sold more bonds than planned.”

The ministry, which had planned to sell as much as 4 billion zloty of bonds at the auction, found buyers for 2.81 billion zloty of floating-rate notes maturing in January 2020 and 1.43 billion zloty of zero-coupon securities due in July 2017, it said in an e-mailed statement today.

Foreign Holders

Foreign holders account for 65 percent of Poland’s benchmark 10-year bond, four times the proportion owning July 2017 notes and more than 20 times floating-rate notes due January 2020, according to Finance Ministry data for the end of April.

The government has borrowed 70 percent of 154.8 billion zloty planned for this year, Piotr Marczak, the head of the public debt department at the Finance Ministry, said May 29.

Duda’s election win deepened a selloff that lifted the yield on the country’s 10-year bonds to a nine-month high of 3.21 percent on Wednesday and the spread over the two-year note to 138 basis points. The yield was 3.15 percent at 5:37 p.m. in Warsaw. It probably will increase to 3.5 percent by year-end, according to Arkadiusz Urbanski, a fixed-income analyst in Warsaw at UniCredit SpA’s unit Bank Pekao SA.

German Bunds

“Volatility is still heightened and we saw the bund breaching the psychological level of 1 percent, so things outside of Poland aren’t helping,” he said by phone on Wednesday.

Underscoring the political change, Prime Minister Ewa Kopacz shuffled her government on Wednesday amid an eavesdropping scandal.

“Uncertainty over the election outcome and policy direction afterwards will likely add to the volatility and risk premium, even though Poland’s strong economic and political fundamentals should reduce the negative effects,” Magdalena Polan, a London-based economist at Goldman Sachs Group Inc., wrote in a note on June 8.

Poland’s economy grew 3.6 percent in the first quarter, statistics office data show. The government expects to curb its general government deficit to 2.3 percent of gross domestic product in 2016 from 2.7 percent seen for this year, Finance Minister Mateusz Szczurek said in parliament on Wednesday.

The central bank has kept its key interest rate at a record-low 1.5 percent since March. Barring some “extraordinary” event, any change in rates is off the cards until after Poland’s parliamentary election in the fourth quarter and the appointment of a new policy panel, Governor Marek Belka said June 3.

Forward-rate agreements show scope for almost a quarter-point increase in rates by June next year, trading 20 basis points above the Warsaw Interbank Offered Rate.

“With the first interest-rate increase coming no sooner than in 12 months, short-term notes are looking much more stable than longer maturities now,” Pekao’s Urbanski said.

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