- Yields on government 10-year bonds climb 17 basis points
- Equity benchmark heads for lowest close since April 2009
Polish bonds fell, sending 10-year yields up the most in more than a year, and stocks retreated after Standard & Poor’s unexpectedly cut the country’s rating in the nation’s first-ever sovereign downgrade.
The yield on the country’s 10-year government note rose 19 basis points to 3.19 percent, after increasing as much as 26 basis points. The equity benchmark was poised to close at the lowest level since 2009 after S&P reduced the sovereign’s credit score on Friday to the third-lowest investment level even though the debt previously had a positive outlook.
“When the 10-year bond opened 25 basis points higher, there was nothing but panic,” Mateusz Milewski, a fixed-income trader at Warsaw-based Bank Millennium SA, said by e-mail. “Luckily there was demand at this level from clients that had short positions.”
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 drew criticism from the European Commission. European Union President Donald Tusk, a former Polish prime minister whose party lost to Law & Justice, said the country’s image has been “shaken slightly.”
The WIG20 Index of stocks slid 2.6 percent. The zloty climbed from a four-year low against the euro, adding 0.4 percent to 4.4612 as of 4:57 p.m. in Warsaw after falling the most since September 2011 on Friday in the wake of the downgrade.
Bank Gospodarstwa Krajowego, a lender wholly-owned by the Polish state, will likely reduce pressure on the currency by selling euros, economists at UniCredit SpA’s Bank Pekao SA said. A BGK spokeswoman Anna Czyz declined to comment when asked whether the bank was buying the zloty.
The government sold 2.4 billion zloty, or 400 million zloty more than its maximum target, of 32-week bills in an auction on Monday. Local banks bought notes as an alternative to the central bank’s bills, according to Ernest Pytlarczyk, chief economist at Commerzbank AG’s MBank SA. Law & Justice lawmakers plan to tax bank assets 0.44 percent beginning next month to help finance increased social spending. Government securities are exempt from the charge.
The S&P cut Poland’s rating to BBB+, citing concern that the government is weakening the independence of “key institutions.” The EC took a first step to discipline Poland’s new ruling party for exerting greater sway over the state, fueling a debate about whether eastern Europe is slipping back into its authoritarian past.
Before the S&P move, which carries a negative outlook, Bank Zachodni WBK SA and ING Groep NV were predicting only a reduction in the outlook rather than an outright downgrade. The cut to both the outlook and the rating at the same time is hard to understand, according to Olaf Pietrzak, head of fixed-income investments at Warsaw-based mutual fund Skarbiec TFI SA.
“They could have changed the outlook, giving themselves a month or two for watching, and then cut the rating,” Pietrzak said by e-mail on Monday. “People haven’t been eager to buy Polish long-term bonds lately and now they got a good reason not to.”