Poland Sells Record Amount of Bonds as Rate-Cut Bets Revive

Poland sold a record amount of domestic bonds at an auction today and borrowing costs dropped to all-time lows as investors bet that the central bank will keep cutting interest rates to bolster the economy.

The Finance Ministry raised a total of 13.7 billion zloty ($4.4 billion) from the sale of notes maturing in July 2015 and in April 2018, it said in an e-mailed statement. The two-year bonds were priced to yield 3.285 percent and five-year debt at 3.437 percent, according to data compiled by Bloomberg.

While policy makers have signaled they may pause after cutting rates for a third month in a row, data last week showed the biggest slump in industrial output in more than three years as inflation slowed to the central bank’s target. The sale came two days before the ministry is due to pay off 10.1 billion zloty in maturing bonds, the data shows.

“An impressive result,” Arkadiusz Urbanski, a fixed-income analyst at Bank Pekao SA, said by phone from Warsaw today. “Expectations that the easing cycle will continue are being revived and that along with the money coming back from redemptions has bolstered demand.”

The yield on domestic 10-year notes fell 12 basis points to 3.82 percent following the sale, sending the premium over similar-maturity German bunds in euros to a four-year low of 225 basis points, or 2.25 percentage points.

The zloty advanced 0.2 percent to 4.1662 per euro at 2:27 p.m. in Warsaw, as the government today also sought to sell as much as $1.6 billion of shares in PKO Bank Polski SA, the nation’s biggest bank, to foreign and domestic investors.

Record Demand

Today’s bond sale attracted “record” demand from international investors, Piotr Marczak, the head of the ministry’s public debt department, said in an e-mailed statement today.

The ministry sold 12.4 billion zloty of five-year bonds at the primary and the subsequent supplementary tenders as investors bid for 16.6 billion zloty of the notes, according to the statement. It raised 1.3 billion zloty from two-year debt.

The government had planned to sell as much as 9 billion zloty in two-year and five-year debt.

Poland met around 40 percent of this year’s borrowing needs after the auction, where local investors were “very active,” Deputy Finance Minister Wojciech Kowalczyk told reporters in parliament today. The foreign demand “bodes well” for future sales and the plan to finance more than half of 2013 needs through the end of the first quarter, he said.

The country’s track record of combining economic growth with budget-deficit cuts buoyed demand for zloty debt last year as international investors sought alternatives to near-zero interest rates in the U.S., Japan and the euro area.

Below Maximum

Today’s auction is the second domestic bond sale this year. The government failed to reach its maximum target at the auction on Jan. 3, selling 3.66 billion zloty of 10-year and 16-year debt, less than the maximum 5 billion zloty planned.

Kowalczyk said he saw no signs that foreign funds are pulling out from Polish domestic bonds while the local investors are “rebuilding their position” in the market.

Local pension funds, the biggest investors in government debt until July 2010, increased their cash holdings last year and missed the biggest rally in 10-year yield in a decade.

Before it's here, it's on the Bloomberg Terminal.