Poland to Test Post-Downgrade Bond Market After Floater Success

Updated on
  • Finance ministry to auction benchmark 10-year bonds Feb. 4
  • Foreigners reduced zloty bond holdings in January as S&P cut

Even after a record sale of floating-rate notes, Poland may struggle when it auctions securities more popular with foreign investors this week as the sovereign returns to debt markets following last month’s shock rating downgrade.

The government will offer up to 8 billion zloty ($1.96 billion) of bonds including benchmark 10-year 2.5 percent-coupon securities at an auction on Feb 4. The Finance Ministry is seeking to capitalize on global appetite for fixed-income securities amid the stocks rout after last week’s sale targeting local buyers drew the most bids since July 2014.

“We don’t see much enthusiasm towards the longer bonds and the recent strengthening hasn’t changed that tendency,” Rafal Benecki, the Warsaw-based chief economist at ING Bank Slaski SA, said on Friday. “There’s been a change in the perception of Poland after the downgrade and it has influence over the behavior of real-money investors.”

The government is trying to shake off the negative attention it received after Standard & Poor’s cut its rating on Jan. 15, citing concern over the independence of key institutions. The cabinet needs to keep its financing options open to cover a record 2016 budget deficit as the Law & Justice party implements its family-benefits program, delivering on campaign pledges that gave it a landslide victory in October’s general election.

January Outflow

Foreign investors reduced their holdings of zloty bonds in January from 206.7 billion zloty, or about 40 percent of the total, at the end of the year, Piotr Marczak, head of the public debt department at the Finance Ministry, said by e-mail on Friday, without specifying the outflow. Non-residents held 84 percent of fixed-rate bonds maturing in July 2025, the most popular longer-term zloty note, ministry data shows.

The yield on the note due in July 2026 that will be offered at Thursday’s auction rose four basis points to 3.19 percent at 1:40 p.m. in Warsaw, increasing the premium over similar German bunds to 285 basis points, the highest since March 2014. The zloty rose 0.6 percent to 4.3949 per euro, strengthening past 4.40 for the first time since the S&P downgrade, which sent the currency tumbling to a four-year low.

Bank Levy

Last week’s sale of 8.1 billion zloty of bonds, including 4.7 billion zloty of floating-rate notes maturing in 2020 and 2026, was “clearly tailored to fit local investors,” according to Miroslaw Budzicki, a fixed-income strategist at Poland’s largest lender PKO Bank Polski SA. Foreign investors held 1 percent of the 2020 floaters and 6 percent of those due in 10 years. Polish banks held at least 43 percent of both series of notes, ministry data shows.

Local lenders flocked to the auction of floaters and 2018 notes in part because of a new levy on their assets, which encourages lenders to buy government securities because they’re exempt from the tax. That’s fueling a switch away from NBP-bills, the short-term securities issued by the central bank to mop up lenders’ excess liquidity. At the weekly open-market operation on Friday, banks bought 74.4 billion zloty of seven-day NBP-bills, the least since August and down from 91.5 billion zloty the week before.

While lenders could exchange about a third of their NBP-bill holdings into government bonds, the government still needs foreign capital to help finance its budget shortfall this year, Arkadiusz Bogusz, head of investments at Opti TFI SA fund in Warsaw, said on Thursday.