- 10-year borrowing costs surpass two-year by most since 2002
- Poland S&P's first sovereign downgrade from positive outlook
It just got a whole lot more expensive for Poland to live up to a goal of selling more longer-dated bonds after the shock credit-rating downgrade by Standard & Poor’s.
The yield on the eastern European nation’s 10-year bonds rose 22 basis points on Monday, the most since September 2014, after S&P knocked the country down by one level on Friday, citing concern that the government is weakening the independence of “key institutions.” The selloff in the longer-dated securities pushed their premium over two-year notes to the widest since at least 2002, data compiled by Bloomberg show.
The jump in costs is casting doubt over how successful Poland will be in lengthening the maturity of its outstanding local-currency debt as outlined in a three-year plan in the budget approved by Poland’s new leadership. Investors are more hesitant to hold money in longer-dated bonds on concern the ruling Law & Justice party’s policies may worsen the fiscal deficit over time and hurt the country’s status as a haven.
“The Finance Ministry may have to give up its long-term goal to extend the debt maturity," said Pawel Golebiewski, who helps manage an equivalent of $643 million bonds at Warsaw-based mutual fund BPH TFI SA. “The spread between two-year and 10-year yields is close to record levels, so it’s most rational to shorten the maturity of new issuance."
S&P’s rating cut was its first downgrade of a sovereign from a positive outlook, a spokesman said by e-mail on Monday. Poland’s Finance Ministry didn’t immediately respond to a request for comment.
While two-year yields rose, the increase wasn’t as much as for 10-year rates as a government plan to tax bank assets boosts demand for shorter-maturity debt. At an auction of 32-week Treasury bills on Monday, the Finance Ministry sold more debt than planned as demand surpassed supply by almost fivefold. Since government securities are exempt from the new levies, they’re becoming more appealing than the central bank notes lenders traditionally used to park short-term cash.
Poland’s goal is to extend maturities on average to 4.5 years from 4.27 years at the end of 2015, according to the country’s public debt management strategy for 2016-2019. The yield on 10-year bonds fell nine basis points to 3.11 percent at 3:14 p.m. in Warsaw, leaving the premium over two-year notes at 163 basis points, six points below the highest since 2002 reached yesterday.
“In case demand from foreign investors drops, issuing shorter bonds or bills could be a good solution for the government, especially that we’ve recently seen large demand from banks in the short end of the curve,” Radoslaw Galecki, who helps manage the equivalent of $3.1 billion at mutual fund Aviva Investors TFI SA in Warsaw.
S&P cut Poland to BBB+, the third-lowest investment grade, citing in its statement on Friday a series of measures from the new government that "weaken the independence and effectiveness of key institutions." Since winning elections in October, the government led by Prime Minister Beata Szydlo’s Law & Justice party pushed to overhaul the constitutional court and public media, moves that also drew criticism from the European Commission.