Opposition Victory in Poland Will Mean U-Turn for Bond Investors

  • Poll-leading Law & Justice favors rate-cut proponents
  • Longer-dated securities seen suffering on spending plans

Poland’s parliamentary elections may spawn another winner besides the opposition Law & Justice party: the nation’s short-term bonds.

Longer-dated securities, favored by global investors, rallied almost six times as much as shorter-maturity notes since June amid bets for more stimulus in the euro zone and a delay in the liftoff of U.S. interest rates. That’s about to reverse as Law & Justice, forecast to win Sunday’s vote, may push to appoint central-bank officials who favor cutting rates, buoying short-term bonds that are more sensitive to monetary policy, according to PKO Bank Polski SA, the nation’s largest lender, as well as Credit Agricole SA and Commerzbank AG.

The central bank under Governor Marek Belka has resisted calls since March to reduce borrowing costs even as consumer prices fell for 15 successive months and stayed below the bank’s target of 2.5 percent since 2012. A shift in that policy should help lower bond yields, though long-term debt looks under pressure amid concern the expansive spending planned by Law & Justice will worsen fiscal health in the coming years. 

“The next rates panel will be dovish, maybe even dovish enough to return to the easing cycle,” Piotr Bujak, a senior economist at PKO, said by phone on Oct. 20. “This is supportive of the short end of the yield curve. For longer-term bonds fiscal policy, macro-economic risk and the global situation are more important.”

The composition of the rate-setting committee will start changing as early as February, when the next parliament will vote in six of its 10 members. President Andrzej Duda, also from Law & Justice, will appoint a further two panelists and pick Belka’s successor in June. The party will “certainly” search for candidates with a dovish approach, Henryk Kowalczyk, a lawmaker, told PAP newswire on Wednesday.

Record Low

Since the central bank reduced the benchmark interest rate to a record low 1.5 percent in March, persistent deflation in the European Union’s biggest eastern economy led to a clamor for even lower rates. Producer prices fell 2.9 percent from last year in September, the most since at least 1992, and a decline in consumer prices deepened to 0.8 percent. Forward-rate agreements, used to speculate on borrowing costs, are signaling policy makers have room for a quarter-point reduction over the next nine months.

“Short-term rates will fall, because investors will start to price in more rate cuts,” Ernest Pytlarczyk, the chief economist at Commerzbank’s MBank SA, said last week. He expects a steepening of the yield curve as long-term bonds “might be hit badly if only half of the pre-election promises were delivered.”

Law & Justice has pledged to increase spending to help the poorest and boost the economy, including a 350 billion zloty ($93 billion) loan plan in the style of the European Central Bank’s lending program for banks. Public opinion polls show Law & Justice winning the Oct. 25 election but are mixed over whether the party will gain a majority.

Performance Gap

Bonds due in three years or earlier have gained 1.1 percent since June, compared with a 5.9 percent advance in securities maturing in 10 years or more. The gap between 10-year and two-year yields has narrowed to 102 basis points from as high as 142 basis points in June, reflecting the underperformance of shorter-term notes.

The reconstituted central bank may cut rates as early as March with a 50 basis-point reduction, Jakub Borowski, the chief economist at Credit Agricole SA’s Polish unit, said by phone on Tuesday.

“The short end of the yield curve will be dragged down by the new rate council,” he said.

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