(Updates with non-competitive auction in second paragraph.)
Oct. 19 (Bloomberg) -- Poland sold five-year bonds at the lowest yield in 18 months today at the first government debt auction since Prime Minister Donald Tusk’s re-election this month on pledges to cut the budget deficit.
The Finance Ministry sold a total of 3.64 billion zloty ($1.16 billion) of new five-year bonds at the main and non- competitive auctions, more than the up to 3 billion zloty planned, according to e-mailed statements today. The average yield slid to 5.105 percent from 5.256 percent at the previous sale of the benchmark five-year debt on Aug. 10. It was the lowest since the sale of the similar-dated debt was priced to yield 4.987 percent on April 21, 2010, according to the ministry’s website.
Investors bid to buy 9.88 billion zloty of 4.75-percent notes due in October 2016 at the auction, the biggest demand for that maturity debt since May 18, according to data compiled by Bloomberg.
Poland’s bonds, the world’s third-worst performers last quarter, are the second-best this month, with 5 percent returns in dollars spurred by Tusk’s promise to cut the budget gap below 3 percent of gross domestic product next year from a record 7.9 percent in 2010. Polish five-year bond yields fell from the highest relative to their German equivalents since 2004 last month to a 373 basis-point spread today. The premium peaked at 443 basis points on Sept. 22, data compiled by Bloomberg show.
“The perception of Poland has improved in recent weeks,” said Miroslaw Budzicki, fixed-income analyst at PKO Bank Polski SA, Poland’s largest lender. “Demand for bonds is clearly holding up and the yield was towards the lower end of expectations.” He predicted the average yield at 5.10 percent to 5.15 percent.
Tusk, 54, is the first Polish prime minister to win a second term since communism ended in 1989. His Oct. 9 victory was “credit positive” and may spur fiscal restraint, Moody’s Investors Service said in a report yesterday. Poland is likely to show the most significant improvement in budget finances of any country in eastern Europe or the former Soviet Union next year, according to the International Monetary Fund’s World Economic Outlook report in September.
The European Union’s largest eastern economy financed 92 percent of this year’s borrowing needs before October, according to the Finance Ministry. Poland plans to sell as much as 7 billion zloty of bonds between October and December, the lowest quarterly amount since the fourth quarter of 2000, the ministry’s data show.
Default Risk Drops
The bonds will be settled on Oct. 25, the same day the government will pay a total 7.3 billion zloty in interest to holders of bonds due in October 2013, 2015, 2017, 2019, 2020 and 2021, Piotr Marczak, head of the ministry’s debt management department, said in an e-mailed statement on Sept. 30.
The cost to insure Polish debt against non-payment for five years through credit-default swaps has dropped 67 basis points, or 0.64 percentage point, this month to 229 basis points as of 2:00 p.m. in Warsaw, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
--Editors: Wojciech Moskwa, Linda Shen
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