- 10-year dollar bond price at 150 basis points over Treasuries
- Borrowing costs have risen since Law & Justice won elections
Poland is feeling the pinch as the government returns to the international debt market after its first-ever sovereign downgrade.
The government sold $1.75 billion of 10-year bonds on Wednesday yielding 150 basis points more than U.S. Treasuries, 25 basis points higher than than the average premium on its dollar debt. That’s also higher than the cost of selling similar-maturity notes at the last offering of dollar bonds in January 2014.
Poland’s borrowing costs have increased since the Law & Justice party won elections in October and pushed for more control over key institutions, measures cited by S&P in its decision to cut the government one level to BBB+ on Jan. 15. While Polish assets have recovered since then, supported by European Central Bank stimulus and accommodative policies in the U.S., policy risks still weigh on investor sentiment.
“This is the price of elections, the new Law & Justice government, policy concerns and the rating downgrade,” Tim Ash, head of emerging-market strategy at Nomura International Plc in London, said on Wednesday. “Hopefully this will encourage a more market-friendly policy response from the authorities.”
While announcing the downgrade, S&P’s first ever for a sovereign issuer with a positive outlook, the rating agency warned of fiscal overspending and a weakening of the country’s system of “checks and balances.”
The decision came four days after the Finance Ministry sold 1.75 billion euros of 10- and 20-year securities. Bonds tumbled, sending the yield on the 10-year note to as high as 2.06 percent from 1.54 percent at the sale. The rate has since dropped and was at 1.33 percent on Thursday.
Still, the nation’s dollar securities have underperformed peers since the October elections, gaining 0.5 percent compared with a 3 percent return for the Bloomberg USD Emerging Market Sovereign Bond Index. The extra yield investors demand to hold Polish bonds rather than Treasuries was at 125 basis points, up from 89 at the end of October, a JPMorgan Chase & Co. index shows.
This week’s dollar-bond offering is part of the Finance Ministry’s plan to meet half of the government’s 2016 borrowing requirement of 182.7 billion zloty ($48 billion) by the end of March. It covered 39 percent of those needs by the end of February. The ministry will release information on the supply of bonds in the second quarter at 3 p.m. today.
The market has been doing well, which helped the sale, even though it’s a “bit soon after the euro deal,” according to Marco Ruijer, a money manager who oversees about $7 billion of emerging-market debt at NN Investment Partners.