Draghi to Clear Path for Belka as PineBridge Buys: Poland Credit

European Central Bank President Mario Draghi’s expected interest-rate cut this week will clear the way for Poland to follow suit, prolonging the best rally in zloty bonds in five years, PineBridge Investments said.

“I am a buyer of Polish bonds,” Anders Faergemann, global emerging-markets fund manager at PineBridge, which runs $72 billion of assets, said from London on April 26. An ECB rate reduction is “becoming more likely” and “would provide more room for the National Bank of Poland to cut borrowing costs.”

The ECB will cut its main refinancing rate 25 basis points to a record 0.5 percent on May 2, the median estimate from a Bloomberg survey of 66 economists shows, after gauges of business activity for April underscored weakness in the euro region. Polish central bankers left the key interest rate at a record low of 3.25 percent at their last meeting in April, after lowering it by 150 basis points between November and March.

Zloty forward-rate agreements, derivatives used to bet on interest rates, are 64 basis points below the Warsaw Interbank Offered Rate, showing scope for almost three quarter-point cuts in Poland over nine months. The extra yield on Poland’s 10-year zloty bonds over German bunds fell to a four-year low last week.

Consumer Austerity

The yield on Polish 10-year notes tumbled 59 basis points in April, the biggest monthly decline since November 2008, according to data compiled by Bloomberg. The rate on the securities fell to a record 3.35 percent at 2 p.m. in Warsaw.

Weighed down by sagging consumer demand, high debt and austerity, the economy of the 16-nation euro area will shrink 0.4 percent in 2013 after a 0.6 percent reduction last year, the median estimate from a Bloomberg survey of 56 analysts shows.

The region’s purchasing managers’ index of manufacturing fell to 46.5 in April, Markit Economics said last week, staying below the 50 mark that divides contraction from expansion for the 21st straight month. Loans to the private sector in the euro area fell 0.8 percent from a year earlier in March, contracting for an 11th month, the ECB said on April 26.

Following a series of cuts, Poland’s official interest rates are 250 basis points above those of the ECB, the smallest premium since 2010. Central bank Governor Marek Belka said on April 10 that policy makers are open to further easing should the outlook for the country’s $515 billion annual economy have worsened. The Finance Ministry last week cut its 2013 growth target to 1.5 percent from 2.2 percent.


The inflation rate in March dropped to 1 percent, the lowest since June 2006 and compared with the central bank’s 1.5 percent to 3.5 percent “tolerance range” around its 2.5 percent goal. March industrial production dropped 2.9 percent from a year earlier, after decreasing 2.1 percent in February.

“I was quite surprised by how soft the Polish economy is and I’m not sure that the central bank is done cutting interest rates at this stage,” Faergemann said.

While the ECB’s expected cut may be “a psychological signal” for Polish policy makers to follow suit, its impact on decisions will be “limited,” Miroslaw Budzicki, a fixed-income analyst at PKO Bank Polski SA, said by phone on April 26.

“The fact that such a decision is made will prove that concerns over economic growth in Europe are rising,” he said. “Still, there is a risk that the market is discounting rate cuts in Poland too aggressively.”

No Improvement

Draghi said on April 19 he hasn’t seen any improvement in economic reports, after hinting he might lower borrowing costs if the recovery falters. Executive board member Vitor Constancio said on April 24 the ECB is “ready to act.” The Frankfurt-based bank for the bloc’s $13 trillion annual economy has kept rates at 0.75 percent since July.

The additional yield investors demand to hold Polish dollar-denominated bonds rather than U.S. Treasuries was unchanged at 128 basis points today, according to indexes compiled by JPMorgan Chase & Co. The spread of 10-year zloty yields over German bunds narrowed three basis points, or 0.03 percentage point, to 213, data compiled by Bloomberg show.

The zloty strengthened 0.7 percent to 4.1308 against the euro, paring its decline in 2013 to 1.2 percent.

The cost of Polish credit-default swaps rose one basis point to 81, data compiled by Bloomberg show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege.

The extra yield on Poland’s 10-year bonds over the country’s two-year notes, which stood at 69 basis today, will decrease as the shorter-dated debt is “probably not too far away from where the market is pricing in the rates outlook,” Faergemann at PineBridge said.

“We could see the whole curve shifting lower, but in the current environment you want to go with the long end and then see how the central bank reacts,” he said.