Altus Fund Favors Long-Term Zloty Bonds on Post-ECB Yield Hunt

Polish five- and 10-year bonds will outperform shorter-maturity debt as investors have priced in much of the country’s expected interest-rate cuts, according to Altus TFI SA’s Krzysztof Madej.

The extra yield investors demand to hold Poland’s 10-year bonds relative the country’s 2-year notes dropped to a 13 month low of 90 basis points on July 7, from as high as 167 in December, according to data compiled by Bloomberg.

Poland’s central bank has kept its key rate unchanged at a record-low 2.5 percent for the 12th month last week even as inflation slumped to 0.2 percent, matching the lowest on record. The European Central Bank reduced its deposit rate below zero for the first time last month in an effort to boost inflation and credit growth, increasing appetite for higher-yielding assets from emerging markets including Poland.

“Investors should move up the Polish bond curve,” Madej, who helps manage 3.2 billion zloty ($1 billion) at the Warsaw-based mutual fund as head of fixed-income assets, said in an interview yesterday. He expects Poland’s “very high real-interest rates” to attract money flowing into developing markets after the ECB’s moves.

As inflation “is no longer the number one theme,” with investors prepared with “two-to-four months of deflation” in the country, it’s the pace of economic rebound that will draw most attention, Madej said. If growth in the second quarter slows to around 3 percent and the zloty strengthens below 4 per euro, the central bank will reduce borrowing costs, he said.

No Cycle

“There’s a 60 percent chance Poland will cut interest rates,” Madej said, adding that apart from local factors, the central bank will have to take into account “indirect” pressure from peers including Hungary, Turkey, Mexico and Sweden, all of which have lowered rates in past few weeks.

The yield on Poland’s 10-year government bonds fell five basis points to 3.34 percent in Warsaw yesterday, a 13-month low, while the yield on 2-year bonds declined six basis points to an all-time low of 2.44 percent. The zloty advanced 0.1 percent to 4.1382 per euro. Six-month zloty forward-rate agreements traded 38 basis points below the Warsaw Interbank Offered Rate, indicating traders bets on more than a quarter-point cut in interest rate cuts by early January.

“If the rate council decides to cut, it will be a reduction by 50 basis points,” he said. “A cut by 25 basis points might be viewed as the beginning of a cycle, something the rate panel would prefer to avoid.”

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