Bloomberg News

Polish Inflation Bets at 6-Month Low Cut Yield Before Sale

June 15, 2011

(Updates with inflation data in eighth paragraph.)

June 15 (Bloomberg) -- Bond investors are boosting bets that Poland’s central bank will succeed in taming inflation after policy makers raised borrowing costs at the fastest pace in almost seven years.

The rally in fixed-rate debt has pushed the yield on inflation-linked bonds due in 2023 to 287 basis points, or 2.87 percentage points, below similar-maturity standard notes last week, the smallest gap since December, data compiled by Bloomberg show. The so-called breakeven rate, which reflects investor expectations for inflation over the life of the bonds, has narrowed from 340 basis points on March 11. The government plans to sell as much as 2.5 billion zloty ($921 million) of inflation-linked and floating-rate notes today.

Poland has raised its benchmark rate to 4.5 percent from 3.5 percent at the start of the year, the most since a 1.25 percentage-point increase from June to August in 2004. The central bank will “pause” its monetary-tightening policy to gauge whether this year’s four interest-rate increases will be enough to slow inflation, Governor Marek Belka said on June 8.

“People thought at the beginning of the year that the central bank was behind the curve but with the last three rate hikes in a row they managed to calm the market,” said Dmitri Barinov, who helps manage 12 billion euros ($17.4 billion) in fixed-income assets at Union Investment Privatfonds in Frankfurt. “It had a positive impact on the curve because people now think they control inflation having delivered hikes to normalize rates. This is of course positive for the longer end bonds.”

Inflation Pickup

The government raised a total of 1.03 billion zloty at the last sale of inflation-linked bonds and floating-rate notes due in January 2021 on March 16.

Inflation-linked debt pays interest on a principal amount indexed to the consumer-price index. When inflation speeds up, the securities pay more interest. They return more than fixed- interest bonds when the average inflation rate is higher than the breakeven rate.

Poland in December resumed sales of inflation-linked bonds for the first time in more than two years as investors sought protection against rising consumer prices.

The annual inflation rate climbed to 4.5 percent in April from 3.1 percent in December. A report today will probably show it quickened to 4.6 percent last month, exceeding the central bank’s 2.5 percent target for an eight month, according to a median estimate in a Bloomberg survey of 28 economists. The statistics office is schedule to report the data at 2 p.m. in Warsaw.

Tightening Cycle

The central bank is “still in the tightening cycle,” Belka said last week after lifting the main rate a quarter percentage point. Policy makers said they didn’t rule out further increases if prospects for consumer prices worsen, according to a central bank statement that day. Inflation will probably slow within months, Andrzej Slawinski, head of research at the central bank, said on Radio Tok FM on June 10.

Investors in interest-rate derivatives are betting on one more increase in borrowing costs by the end of the year. Six- month forward contracts are trading 33 basis points above three- month Warsaw Interbank Offered Rate.

“I wouldn’t be surprised to see two more rate hikes this year,” Union Investment’s Barinov said. “Inflation is still a concern. I can understand why the central bank turned out to be more aggressive.

Union Investment is ‘‘pretty heavily’’ invested in two-year notes, he said. Ten-year bonds and debt maturing in September 2022 are also ‘‘attractive’’ as the extra yield they offer over German equivalent debt is still higher than before the 2008 financial crisis, Barinov said.

Investors demand an extra yield of 287 basis points to hold Polish 10-year bonds in zloty rather than their euro-denominated German equivalents, according to data compiled by Bloomberg. That compares with 193 basis points on Sept. 1, 2008.

--With assistance from Robert Brand in Cape Town. Editors: Stephen Kirkland, Linda Shen

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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