Poland Sails Through Debt Auctions as Downgrade Headwinds Abate

  • Government meets more three quarters of its 1Q bond sales goal
  • Stimulus in EU, Japan pushes investors to seek higher yields

Poland’s first-ever downgrade isn’t standing in the way of the government’s most ambitious fundraising plan ever.

The Finance Ministry sold 20 percent more bonds than targeted at its auction on Thursday, bringing it more than three-quarters of the way to its quarterly target of 38 billion zloty ($9.6 billion). The government managed to cut its borrowing cost on five-year notes to 2.22 percent, less than it paid to sell similar-maturity debt a week before Standard & Poor’s cut the sovereign by one step to BBB+ on Jan. 15.

While the move initially led to a selloff in Polish assets, demand has returned as European and Japanese stimulus encouraged investors to seek higher yields, with the premium for the country’s bonds over German debt trading near a two-year high. Moreover, Poland’s economy growing at more than double the rate in the euro area has helped offset concern over the government’s plan to increase spending and take more control of key institutions, a policy that S&P cited as a risk in its decision last month.

“The auction was a full success as most local factors are supportive,” Maciej Slomka, who runs an absolute-return fixed-income fund at a Warsaw-based asset manager Opti TFI SA, said on Thursday. “The spread over bunds looks attractive, but I would be far from uber-optimistic as global risk-off could return any time.”

The Finance Ministry sold 7.2 billion zloty of bonds yesterday at an average yield that was 16 basis points less than an offering of the debt on Jan. 7. The yield on Poland’s 10-year bond fell three basis points to 2.93 percent at 11:20 a.m. in Warsaw, narrowing the extra yield over German debt to 274 basis points, compared with a one-year average of 228 basis points.

Morgan Stanley turned overweight from market-weight in zloty bonds on Tuesday, saying investor concerns over government policies pushed valuations of the country’s bonds to attractive levels. Societe Generale SA on Wednesday said there’s further scope for declines in the premium over developed-market debt, especially longer-dated maturities.

Poland’s economy grew 3.9 percent in the fourth quarter, the fastest pace in four years. Tax revenue showed “a positive trend” in January, with payments from value-added tax increasing 16 percent from last year, Deputy Finance Minister Konrad Raczkowski said on Monday. Any threat of inflation eroding returns on fixed-income securities remains at bay after consumer prices fell 0.7 percent last month, underpinning demand for local bonds.

The Law & Justice party government has raised 28.9 billion zloty so far this year in local bond auctions to cover increased social spending that was pledged during its campaign that led to a landslide victory in October’s general election.

“The jury’s still out” on Poland’s new government, Marc Chandler, senior vice president and head of global foreign-exchange at Brown Brothers Harriman, told Bloomberg News in Warsaw on Wednesday. The Law & Justice cabinet “has got to be careful, because not just domestic investors, but also international investors are watching what happens,” he said.

After tumbling 3.6 percent against the euro in January and underperforming most developing-nation peers, the zloty has gained 0.9 percent this month, the second-best performance among 24 emerging-market currencies tracked by Bloomberg.

“The downgrade was a warning, nothing more than that,” said Arkadiusz Urbanski, a fixed-income analyst at UniCredit SpA’s Polish unit Bank Pekao SA, who expects bond yields on Polish 10-year bonds to fall further in the coming weeks. “The auction was very successful, with solid demand.”

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