Polish Two-Year Note Rally Sends Yield to Record Low on Tax Plan

  • Yield on two-year notes slumps 13 basis points to all-time low
  • Local banks buy short-dated notes as NBP bills face new levy

Poland’s two-year notes gained, driving yields to an all-time as plans to introduce a tax on bank assets spur demand for the government’s short-term debt.

The two-year yield dropped 13 basis points to 1.46 percent at 1 p.m. in Warsaw, down from a five-month peak of 1.91 percent on Dec. 14. Lawmakers are working on a bill to impose a 0.44 percent annual tax on banking assets that excludes government debt from the levy.

The ruling party, which holds a majority of seats in Parliament, wants the legislation to take effect as early as next month as it boosts debt sales by 40 percent in the first quarter to help fund increased social spending. The changes will encourage financial firms to switch to government debt from central bank bills and other securities, which are not exempted from the tax, according to analysts at Ipopema Securities SA and MBank SA.

“The short-end is now a screaming buy,” Ernest Pytlarczyk, the chief economist at MBank, said in an e-mail. The large supply planned by the government “shouldn’t be a problem for the local debt market in 2016 as banks may substitute their holdings of central bank bills for government securities,”  he said.

The Finance Ministry reached its maximum target in the first offering this year on Thursday as part of a plan to raise 38 billion zloty ($9.5 billion) in the first three months.

The government received 7.24 billion zloty in bids at its sale of 4.56 billion zloty of fixed-rate notes due April 2021, with a yield of 2.382 percent. The ministry had planned to sell from 2.5 billion zloty to 4.5 billion zloty of bonds at the auction.

Banks are the second-largest buyer of country’s zloty-denominated debt, with 167.8 billion zloty of securities held as of Nov. 30, Finance Ministry data show. At the last auction on Dec. 31, the central bank sold 83.9 billion zloty of its benchmark seven-day bills.

“Short-term debt is strengthening on expectations that banks will seek to withdraw from some of their purchases of central bank bills,” Aleksandra Bluj, an interest rate analyst at Ipopema Securities SA in Warsaw, said in an e-mail.  “Time will show how much of the demand” will be met by government securities, she said.

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