Yield Grab Exposes Polish Political Risk Decried by EU, Moody’sby
Scrutiny of legal system, borrowing binge stall bond rally
Moody’s flags political risk before Sept. 9 verdict on rating
Polish political risk is back on the agenda for investors after almost disappearing in the bond market amid a desperate bid for returns.
Yields last month retraced their surge since Law & Justice’s rise to power in October triggered the country’s first-ever downgrade by S&P Global Ratings. The rally is showing signs of fading after borrowing costs climbed nine basis points since Moody’s Investors Service warned Aug. 26 that Poland’s clash with the European Union over democratic values is “credit-negative.”
Polish bonds have been held aloft by a record influx from investors looking to escape negative yields engineered by unprecedented central bank stimulus on almost $10 trillion of sovereign debt. Yet politics are becoming a bigger focus for investors: Michael Hasenstab, the world’s biggest buyer of emerging-market bonds, said this week the rise of nationalism had led him to shift holdings outside of Europe in favor of Latin America. That came months after he cut Polish exposure in his $45 billion fund to a five-year low.
“I would be cautious” to buy Polish debt, said Gabor Nemeth, a money manager who helps oversee about 3 billion euros ($3.3 billion) of assets at Aegon NV’s Hungarian fund unit and is “slightly” underweight Poland relative to benchmarks. Investors who stay in the bonds are exposing themselves to the risk of a widening fiscal deficit, increased international scrutiny of law-making and possible ratings downgrades, he said.
Those risks will be back in focus on Sept. 9 when Moody’s is due to deliver its next review. The nation’s bonds ended a third straight monthly advance in August, with yields falling 11 basis points during the period. Their gains of 2.1 percent since the start of the emerging-market rally two months ago beat the global average.
The Law & Justice party won the elections in October pledging to stand up to the EU and pursue more nationalistic policies. For its part, the EU is moving ahead with its first-ever probe into the rule-of-law of a member country. A failure to address the bloc’s concerns could end up leaving Poland with no vote on European laws.
At the same time, increased social spending could push the fiscal shortfall toward an EU target of 3 percent of economic output and saddle the country with a larger debt load. The government plans to boost borrowing 22 percent next year to cover child benefits and lower retirement age costs.
For Esther Law, a London-based money manager at Amundi Asset Management, which oversees $1 trillion of assets worldwide, cheaper prices would present a buying opportunity. Yields on 10-year benchmark notes have jumped 12 basis points since the borrowing plan was unveiled at the start of the week, to 2.81 percent Thursday.
Polish government bonds “still look attractive from the real yield perspective, especially in a world of very suppressed global bond yields,” Law said. “The bonds will be attractive if there is a selloff and also no more negative headlines on government policy.”
Foreigners held 35.2 percent of local-currency debt at the end of July, down from a record 40 percent in October, according to Finance Ministry data. Hasenstab’s Templeton Global Bond Fund has slashed its allocations to Poland to 3.6 percent at the end of June from 7.4 percent at the end of the third quarter of 2015.
Political divisions and the rise of nationalism in Europe threaten the euro zone as Germany’s open-door policy to refugees prompts a backlash from other member nations, according to Hasenstab, manager of the Templeton fund.
“Because of the refugee crisis, because of terrorism, because of stagnant economies, the rise of populism, nationalism, the very things that would chip away at the euro-zone project are only going to grow,” Hasenstab said in an interview with Bloomberg TV Tuesday. He didn’t mention Poland specifically.
Even if Moody’s doesn’t downgrade its A2 rating, further warnings about politics may give investors pause. The credit score is two levels above S&P’s BBB+ grade. Polish bond prices may also be hit by speculation the U.S. is preparing to raise interest rates this year, sapping demand for higher-yielding assets.
“Domestic factors on yields such as the budget deficit and rating challenges are now getting a global push from a less dovish Federal Reserve,” said Josef Portelli, a London-based money manager at Invesco Asset Management Ltd., which oversees $258 million of fixed-income assets.