Amundi Predicts Sub-3% as Polish Rates Too Real to Resist

Global monetary stimulus combined with higher-than-inflation interest rates will draw investors to Poland’s 10-year bonds, sending yields below 3 percent to a record, according to Europe’s biggest money manager.

The yield, at 3.40 percent today, may drop to less than 3 percent as early as September, said Ludmila Falak-Cyniak, chief investment officer at the Polish unit of Amundi SA, which has 800 billion euros ($1.08 trillion) under management. With the central bank’s benchmark rate at an all-time low 2.50 percent and inflation accelerating 0.3 percent last month, investors will be tempted by the nation’s “very high” real rates, she said.

Near-zero borrowing costs unlikely to be raised soon are driving investors to markets with higher rates of return after inflation. The European Central Bank plans to offer as much as 1 trillion euros to banks to push credit through the euro region, while Federal Reserve Chair Janet Yellen said two days ago that policy makers must press on with record monetary stimulus to battle persistent job-market weakness.

“The yield hunt will continue,” Falak-Cyniak said in an interview in Warsaw on July 15. “The yield-versus-risk ratio is very attractive,” she said, adding that Poland’s economic expansion next year may exceed 4 percent.

Accelerating Growth

Growth in the European Union’s largest eastern economy accelerated to 3.4 percent in the first quarter from a year earlier, the fastest pace in two years. Expansion is seen at 3.6 percent this year and next before slowing to 2.4 percent at the end of 2016, according to the central bank’s projection published two weeks ago after policy makers kept their main rate unchanged for the 12th month.

“We’re witnessing economic growth without inflation,” Tomasz Glinicki, head of asset management at mutual fund Copernicus Capital TFI SA with 8.7 billion zloty ($2.9 billion) in assets, said in an interview on July 14. “I don’t see any hurdles for Poland’s 10-year bond yield not dropping to 2.5 percent.”

The Fed’s Yellen repeated this week that interest rates are likely to stay low for a “considerable period” after the bank ends its asset-purchase program, which she said could happen following the October meeting. ECB President Mario Draghi hopes to rekindle growth and inflation in the 18-country euro bloc with the help of a negative deposit rate and a targeted lending program.

Priced In

The ECB’s easing is already priced in and there isn’t much scope for more gains in Polish bonds, Ronald Schneider, who helps manage about 800 million euros at Raiffeisen Kapitalanlage GmbH in Vienna, said by phone on July 15.

The yield on the government’s 10-year zloty bond fell one basis point today, leaving it 33 basis points above an all-time low in May last year before the Fed announced plans to start paring back bond purchases. The spread over similar German bonds rose less than one basis point to 223 basis points, within 11 points of this year’s low reached two weeks ago. The zloty lost 0.2 percent to 4.1428 per euro at 3:02 p.m. in Warsaw, leaving it 0.3 percent stronger this year.

Inflation, which has remained below the central bank’s 2.5 percent target for 19 months, will temporarily dip below zero in the coming months, central bank Governor Marek Belka told reporters after the July 2 meeting, further increasing the real benchmark interest rate from 2.2 percent. That compares with negative real rates in emerging-market peers Turkey and South Africa, where inflation is higher than their key rates.

“We are in a risk-on environment,” Amundi’s Falak-Cyniak said. “I don’t see any fundamental threats to Poland’s growth scenario.”

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