Pimco Says Debt Losing Allure in Emerging World: Poland Credit
The lure of Polish zloty debt is receding for Pacific Investment Management Co., the world’s biggest bond-fund manager, which sees better opportunities in emerging markets such as Brazil and Mexico.
Domestic bonds, fresh off their best annual return since 2004, have lost 1.1 percent in dollars this year, the worst performance after South Africa and Colombia among emerging- market peers tracked by JPMorgan & Chase Co. The 3.73 percent yield on Polish government notes compares with the 5.36 percent average for global developing nations, the smallest difference in three months, JPMorgan data shows.
“Within the European context it still makes sense to buy Poland,” Francesc Balcells, a fund manager at Pimco’s emerging- markets team, which manages $75 billion in assets, said by phone from Munich two days ago. “But in a broader emerging-market context, there are better opportunities elsewhere.”
Polish bonds are losing their appeal as the economy is mired in its deepest slowdown in four years, with consumers curbing their spending in the face of rising unemployment. Meanwhile, Governor Marek Belka signaled this month that the central bank is close to an end of monetary easing after four quarter-point reductions since November left the benchmark interest rate at 3.75 percent.
Balcells’s comments mark a turnaround from March, when he said that “even globally” Polish bonds looked “attractive” as domestic demand helped the economy weather the global debt crisis and become the only one in the European Union to avoid recession since 2008.
Pimco, BlackRock Inc. and Kokusai Global Sovereign Open are among foreign investors who’ve bought record amounts of Polish domestic bonds in the last three years as the government slashed the budget deficit. That helped send borrowing costs to their lowest level since the fall of communism in 1989 and allowed the government to obtain 27 percent of its 2013 debt financing needs before the year began.
Pimco “was looking for countries where central banks still have room for maneuver” and where economic growth “still looks solid,” Andrew Bosomworth, managing director at the company in Munich, said in a Bloomberg TV interview on Feb. 8. He listed Brazil and Mexico among preferred markets.
Polish 10-year domestic notes yield 4.09 percent compared with 5.04 percent for the equivalent Mexican government debt in peso and 9.7 percent for Brazilian bonds maturing in 2023, according to data compiled by Bloomberg.
The EU’s largest eastern economy grew 2 percent, the slowest pace in three years in 2012, as the euro-area slump weakened Polish consumer spending. The severity of the slowdown surprised the Warsaw-based central bank, which in May raised interest rates due to persistent inflation.
Poland’s slowdown will deepen to 1.6 percent this year, while Mexico and Brazil are set to expand by 3.5 percent, according to economist estimates compiled by Bloomberg.
“The situation in Poland’s neighborhood has been changing very fast and that’s probably why the central bank’s message hasn’t been consistent throughout,” Balcells said. “That has created some disarray in the market.”
Derivatives traders have pared their expectations for further interest-rate cuts following the central bank’s Feb. 6 meeting. Twelve-month forward rate agreements are trading 44 basis points below the Warsaw Interbank Offered Rate, the smallest gap in eight months, data compiled by Bloomberg show.
Foreign selling has been “quite limited” during the recent bond sell-off, Esther Law, a senior emerging-market strategist at Societe Generale SA in London, wrote in an e-mail to Bloomberg yesterday. The government has obtained about half of this year’s funding needs after yesterday’s auction, where the government raised 4.6 billion zloty, she said.
“Polish bonds are more attractive now after the recent correction,” Law said. “It feels that there’s going to be a bit of a pause in the yield increase.”
The cost of insuring Polish debt using credit-default swaps rose one basis point to 90. The swaps, which drop as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege on its debt agreements.
The zloty weakened 0.4 percent against the euro to 4.1737 at 5:17 p.m. in Warsaw, paring this month’s gain to 0.5 percent. The extra yield investors demand to hold Polish dollar bonds rather than U.S. Treasuries was unchanged at 120 basis points, after reaching a four-year low of 97 basis points Jan. 4, according to indexes compiled by JPMorgan.
The additional yield on Polish 10-year zloty bonds over German bunds rose five basis points, or 0.05 percentage point, to 246, data compiled by Bloomberg show.
“The macroeconomic outlook isn’t that encouraging,” Ronald Schneider, who helps manage the equivalent of $1.1 billion in emerging-market debt for Raiffeisen Kapitalanlage GmbH, said by phone from Vienna yesterday. “The spread to German bunds has narrowed quite a lot, which could make bonds more exposed to global risks. The buffer is smaller.”
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