Bloomberg News

Lowest Polish Yield to Hungary Since January Shows Debt Bet

July 05, 2011

(Updates with today’s prices from second paragraph.)

July 5 (Bloomberg) -- Poland is paying the lowest yields relative to Hungary in almost six months as investors reward the European Union’s largest eastern economy for financing most of its 2011 needs and pledging to reduce the deficit.

The yield on Poland’s 10-year bonds dropped 49 basis points, or 0.49 percentage point, to 5.78 percent last quarter, the biggest decline since the first quarter of 2010. The rate for similar-maturity Hungarian securities rose 12 basis points to 7.31 percent, according to data compiled by Bloomberg. The gap between the two reached 157 basis points on June 23, the widest since Jan. 13 and up from as low as 79 basis points on April 18. It stood at 153 basis points today.

Speculation that a worsening of Europe’s credit crisis would raise debt costs spurred the Polish government to cover more than 75 percent of 2011 borrowing needs in the first six months of the year, amassing more cash than needed to repay securities coming due this year. The Finance Ministry canceled sales of Treasury bills in the third quarter and limited auctions of bonds to one per month from as many as two in the previous quarter, according to its statement on June 30.

“Certainly in terms of the fiscal news, Poland has surprised the market on the positive side,” said Ronald Schneider, who helps manage the equivalent of $1.2 billion in east European and emerging-market bonds at Raiffeisen Kapitalanlage GmbH in Vienna.

Hungary’s local-currency bonds have slumped since May amid speculation that Prime Minister Viktor Orban may fall behind on plans to reduce the country’s debt burden, the biggest among the EU’s eastern members at 77 percent of gross domestic product.

‘Credibility’

Poland’s bonds due in 10 years or more returned 7.2 percent in euro terms in the second quarter, the second-best performance for the Europe and Africa region, behind Switzerland, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg.

Poland’s “credibility is to improve from here,” Aurelija Augulyte, an emerging-market analyst at Nordea Bank AB in Copenhagen, wrote in a report on June 23. The Nordic region’s largest bank recommended clients buy Polish bonds maturing in October 2015 and sell the German equivalent.

International investors raised their holdings of zloty- denominated bonds by 22.9 billion zloty ($8.4 billion) to a record 147.6 billion zloty in the five months through the end of May, according to the Finance Ministry’s website. Foreigners are the biggest holders of Polish debt, ahead of local pension funds and banks.

Greek Bailout

Franklin Templeton Investments, which manages more than $733 billion of assets, favors investments in Poland and Sweden as a refuge from the euro-region’s debt crisis, predicting more “downside” risks for Greece and Portugal, according to John Beck, the fund’s London-based co-director of global fixed income.

Greek Prime Minister George Papandreou won parliamentary approval last week for austerity measures required to keep rescue aid flowing as violent street protests erupted in Athens. Finance ministers from the 17-nation euro area approved their share of a 12 billion-euro ($17.4 billion) aid payment for Greece on July 2 and pledged to complete work in the coming weeks on a second package.

Poland, with gross domestic product of $430 billion, is “well-prepared for any financing disruption” caused by a deepening credit crisis among western Europe’s most-indebted countries, ING Groep NV wrote in a report June 28.

Soccer Stadiums

The Finance Ministry had a record 51 billion zloty in cash at the end of June, Piotr Marczak, the head of the ministry’s public debt department, wrote in an e-mailed statement last week. Poland has a total of 47.97 billion zloty of debt maturing this year, according to data compiled by Bloomberg.

“The available cash and lower borrowing needs allow us to reduce the supply of government securities by the end of the year and improve the structure of debt,” Marczak wrote. The government has met “far more” than 75 percent of its borrowing needs this year, he said.

Poland’s budget deficit grew last year to the widest since at least 1995 as rising unemployment lifted social-security costs and the country ramped up spending on roads and stadiums before the European soccer championship it will co-host with Ukraine in 2012.

The government may need to take additional steps to narrow next year’s budget gap to a planned 2.9 percent of GDP as economic growth may be weaker than forecast and tax revenue may fall short of estimates, the European Commission said in a report on June 7. Poland’s economy will expand by 4 percent this year and next, up from 3.8 percent in 2010, according to government budget figures.

Rally Peaked

The rally in Polish long-term bonds has probably peaked as the central banks in developed countries raise interest rates in coming years, according to Peter Bodis, chief investment officer at Pioneer Pekao Investment Management SA in Warsaw. While Polish policy makers last month said they would wait to see the effect of four interest-rate increases this year before taking any further moves, European Central Bank President Jean-Claude Trichet signaled June 30 that officials may raise rates as early as this week after a quarter-point increase in April.

“We don’t see much potential” for a further decline in 10-year bond yields, said Bodis at Pioneer, which runs Poland’s biggest mutual fund with 17.7 billion zloty of assets.

The yield on Poland’s 10-year bond was little changed at 5.76 percent, the lowest since November, at 4:22 p.m. in Warsaw.

Inflows

The extra yield investors demand to hold Polish 10-year bonds instead of German bunds dropped 16 basis points to 276 basis points last quarter. For Hungary, which has GDP of $129 billion, the spread has risen 45 basis points to 428.

The zloty gained 1.2 percent in the second quarter against the euro and 3.5 percent versus the dollar, the third-best performing emerging-market currency after Colombia’s peso and Brazil’s real. Hungary’s forint was little changed, up less than 0.1 percent versus the euro. The zloty slipped 0.1 percent to 3.9454 against the euro today, while the forint weakened 0.4 percent to 264.53 per euro.

Hungary reduced its public debt to 77 percent of GDP following a cabinet decision to funnel private-pension funds to the state, Orban told reporters on June 21. The government plans to use more of the pension portfolios for a second round of debt cuts of between 2 percentage points and 3.5 percentage points in the “early fall,” he told TV2 in an interview the same day.

Poland’s budget deficit may total 30 billion zloty this year, or 10.2 billion zloty less than planned, Deputy Finance Minister Dominik Radziwill was cited as saying in an interview in Dziennik Gazeta Prawna on June 21.

“The recent improvements in fiscal dynamics combined with the lighter supply outlook for zloty local bonds” will support inflows in the third quarter, Barclays Capital strategists including Piotr Chwiejczak in London wrote in a note to customers on June 29.

--With assistance from Andras Gergely in Budapest. Editors: Stephen Kirkland, Gavin Serkin

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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