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Pension Funds Rethink Bonds After Missing Rally: Poland Credit

January 20, 2013

Poland’s pension funds, having missed the biggest government bond rally in a decade last year, are considering a return to notes as a slowing economy makes room for more interest-rate cuts, lowering yields on deposits.

Pension funds, the biggest investors in government paper until July 2010, might have earned as much as 14 percent on bonds last year, the Bloomberg/EFFAS Total Return index shows. Instead, funds increased their cash holdings 74 percent, when the annualized six-month Warsaw interbank deposit rate was 3.98 percent. Holdings in state bonds rose 2 percent, data from the financial regulator show.

Central bank Governor Marek Belka said the current round of interest-rate cuts “is drawing to an end” after the central bank lowered borrowing costs for the third time in as many months Jan. 9. The 10-member monetary council reduced the benchmark rate by a quarter point to 4 percent as the European Union’s biggest eastern economy slowed the most since 2009 in the third quarter. Data released Jan. 18 showed December industrial production fell the most since April 2009.

“Weak data show that investors are correct in their view of the economy and may cause the Monetary Policy Council to reconsider its recent comments about a pause,” Marcin Zoltek, who oversees 60.9 billion zloty ($20 billion) of assets as chief investment officer at Aviva PTE SA, said by phone Jan. 18. “The latest repricing of bonds could be an opportunity.”

Yields Rise

After Belka’s comments, the yield on five-year notes rose to a two-month high of 3.64 percent on Jan. 15 from a record-low 3.2 percent on Dec. 21. The yield was 3.6 percent on Jan. 18, after policy makers including Anna Zielinska-Glebocka said that rate cuts are still needed in February.

Forward-rate agreements used to wager on interest rates show the Monetary Policy Council may cut rates to 3.25 percent, reducing further profitability of keeping cash in banks.

Before the monetary easing, the nation’s 14 privately run funds increased their bank deposits to an all-time record of 23 billion zloty, or 9 percent of their assets in October last year. They kept 121.8 billion zloty of government securities in December, financial regulator data show.

Asset Accumulation

Funds were set up 14 years ago to increase the stability of the retirement system left over from the pre-1989 communist era, where pension contributions were spent rather than saved, and to help build local financial markets. As most of their 16 million members are still several years away from retiring, funds may accumulate assets without any pressure to sell some of them to finance pension payments.

Funds held a record 127.1 billion zloty of bonds in October 2010, more than 24 percent of all government securities denominated in zloty, Finance Ministry data show. In 2011 contributions transferred to pension funds were cut from 7.3 to 2.3 percent of salaries, and new portfolio limits allowed fund managers to invest more in equities. Last year they increased their holdings of publicly traded companies 36.4 percent to 94.8 billion zloty, the financial regulator’s data show.

The WIG20 (WIG20) Warsaw Stock Exchange (GPW) benchmark index rose 20 percent last year and an index of broad Polish corporate debt compiled by JPMorgan Chase & Co., calculated from its initiation in February last year, grew 19 percent.

Train Missed

The discount on five-year bond yields compared with the three-month Warsaw interbank offered rate, or Wibor, surged to a 91 basis points on Oct 12, the most since 2008, and have narrowed to 35 points since then, data compiled by Bloomberg show.

Five-year notes remained the most popular in pension funds’ portfolios in November, amounting to 35.6 billion zloty, Finance Ministry data show, while floaters jumped 53 percent since beginning of last year to 32.5 billion zloty.

“Funds missed the bond-rally train as they had expected more corporate-note issuances last year, which yield more than government notes,” Wojciech Labryga, who manages the 9.5 billion-zloty asset portfolio at PKO BP Bankowy PTE pension fund, said by phone Jan. 18. “They still may consider government securities as an interesting long-term option, provided their prices drop further on poor economic data.”

The extra yield investors demand to hold Polish dollar- denominated bonds rather than U.S. Treasuries increased two basis points to 111 basis points on Jan. 18, indexes compiled by JPMorgan Chase & Co. show. The spread between Poland’s 10-year zloty bond and German bunds widened four basis points, or 0.04 percentage point, to 240, according to data compiled by Bloomberg.

‘Serious Anxieties’

The zloty weakened 0.9 percent to 4.1545 per euro on Jan. 18, trimming a 9.4 percent advance last year, the biggest gain among more than 100 currencies tracked by Bloomberg.

Polish credit-default swaps went up one basis point to 80 basis points, data compiled by Bloomberg show. The contracts cost 77 points less than the average for countries in emerging Europe, the Middle East and Africa in the Markit iTraxxSovX CEEMEA Index, versus a 70 basis-point discount at the end of 2011.

The swaps, which decline as perception of creditworthiness improve, 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.

“Weak data might be supportive of bond prices as they suggest the economy needs more rate cuts,” said Jacek Sokolowski, who helps manage 5.1 billion zloty of assets at the Pocztylion Arka PTE pension fund. “But there are serious anxieties the economy may end up in a recession, which may force a revision of the 2013 budget. We shouldn’t forget that bonds are still very expensive.”

To contact the reporter on this story: Konrad Krasuski in Warsaw at

To contact the editor responsible for this story: David McQuaid at

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