Poland's S&P Cut Lures Bond Buyers Looking Past Political Angstby
Erste, Union Investment have been buyers since S&P downgrade
Premium to hold Polish Eurobond more than doubles in a week
The bond selloff following Poland’s first-ever sovereign downgrade is hard for some investors to resist.
Money managers at Erste Asset Management and Union Investment Privatfonds GmbH have been dipping into the market after Standard & Poor’s surprise rating cut on Jan. 15 sent bonds tumbling. The premium investors demand to own the country’s 2025 Eurobonds rather than similar-maturity Lithuanian securities more than doubled to as much as 93 basis points last week and was 82 basis points on Monday.
“Poland looks quite attractive to peers,” Anton Hauser, who helps oversee $2 billion of emerging-market fixed-income at Erste, said on Friday. He bought the 2026 bonds earlier last week after the downgrade. “Fundamentals are OK, and we do not expect a deterioration on the political front.”
Polish assets slid after S&P cut Poland’s rating one step to the third-lowest investment grade on concern the country’s new leadership is weakening the independence of institutions including the constitutional court and public media. While Poland’s image as a haven among emerging-market peers wobbles, the Law & Justice party-led government said the cut was unjust. Officials say the economy, the largest in the European Union’s east, is sound and the budget deficit will remain within EU guidelines.
S&P’s downgrade was its first ever from a positive outlook for a sovereign, a spokesman for the rating company said. Banks such as Bank Zachodni WBK SA and ING Groep NV were predicting S&P would merely lower the outlook.
The downgrade was “a bit drastic,” according to Anders Faergemann, a London-based managing director at PineBridge Investments Europe Ltd who focuses on emerging-market fixed-income. The fund has retained its “slightly overweight” holdings of Poland’s U.S. dollar bonds after the S&P move as the country’s fundamentals outweigh worries over politics, he said by phone on Friday. “We feel the market has discounted the one-notch downgrade, so we don’t intend to do anything just yet.”
Concern Poland may face another rating cut is something to be wary of, according to Marcin Adamczyk, a money manager who helps oversee about $7 billion of emerging-market debt including Polish bonds in The Hague at NN Investment Partners.
“There is a risk that some bond investments that previously have been attracted to Poland by its haven status” will reconsider their stance should a second downgrade follow, he said.
Four days before S&P’s decision, Poland became the first developing nation to tap the Eurobond market this year even as a rout in Chinese stocks dented investor confidence in developing-nation assets. The government raised 1.75 billion euros ($1.9 billion) in 10-year and 20-year bonds in the offering.
The yield on the euro-denominated bonds due January 2026 climbed 48 basis points following the sale to 2.02 percent on Jan. 20, before trading at 1.86 percent on Monday.
Union Investment Privatfonds, which purchased Poland’s bonds when they were issued days before the downgrade, saw the selloff as a good time to build its position. The fund added to its holding of dollar bonds by PKO Bank Polski SA, Poland’s largest lender, on Jan. 19 as yields on the securities due September 2022 jumped 24 basis points in two days to 4.23 percent, the highest since April 2014.
Poland’s economy is forecast to grow 3.5 percent this year, matching an expansion in 2015 that was the fastest in four years, according to Bloomberg surveys of economists.
“It was a very rare opportunity where relatively stable Polish corporate debt has widened and provided a good entry level,” said Sergey Dergachev, who oversees $13 billion in emerging-market debt at Union Investment in Frankfurt. “Our engagement is longer term. Poland looks very solid from the economic side.”