Allianz Says Chance to Buy East Europe's Best Bonds Done for Now

Updated on
  • Bonds were region's best perfomers in February after S&P cut
  • `Fiscal concerns' about new government to limit gains: Allianz

The best bond rally in eastern Europe is nearing an end as Polish government spending plans limit prospects for further gains, according to Allianz Global Investors.

Allianz, which bought Polish debt in January after Standard & Poor’s downgraded the country’s rating sent prices tumbling and pushed the zloty to a four-year low, reduced its holdings of the bonds last week, according to Naveen Kunam, a London-based senior fund manager at the investment company.

The yield on 10-year government security was little changed at 2.95 percent at 9:44 a.m. in Warsaw, returning to levels before S&P cut the sovereign’s credit rating to BBB+ on Jan. 15 and warned of fiscal overspending and interference into key institutions by the new government. Polish debt has benefited from increased demand for bonds globally as European and Japanese monetary stimulus encouraged investors to seek higher yields.

“There’s not much upside left,” Kunam said. “Polish bonds rallied quite a bit from the dip in January. The fiscal concerns will linger for some time.”

Poland plans to spend 17 billion zloty ($4.2 billion) this year and 22 billion zloty in the next in a family-benefits program that was a pillar of the campaign that helped the Law & Justice party win general elections in October. That’s pushed up projections for this year’s budget deficit to as much as 54.7 billion zloty this year from below 44 billion zloty in 2015.

The government is well on its way to raising 38 billion zloty from bond sales this quarter, the biggest-ever quarterly target, and has financed 39 percent of total borrowing needs for 2016, Deputy Finance Minister Piotr Nowak said last week. The ministry will announce details of its March bond offerings at 3 p.m. on Monday.

Lemon Squeeze

Polish debt returned 3.2 percent in U.S. dollar terms this month, the highest among 11 eastern European countries, according to Bloomberg emerging-market sovereign bond indexes. The yield on Poland’s 10-year bond fell 20 basis points this month, taking the premium investors demand over similar-maturity German securities to 282 basis points. That’s 52 basis points above the average for the past year.

There’s some scope for further yield declines as the spread over bunds hasn’t returned to pre-downgrade levels, but it’s limited, said Marcin Karasiewicz, a fixed-income trader at PKO Bank Polski SA, Poland’s largest lender.

“It’s like squeezing a lemon -- there’s just little juice in it,” Karasiewicz said in an interview in Warsaw on Friday. “You can stay long in the next couple of weeks, but you need to be very cautious looking further forward.”