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BlackRock Sticks With Pimco in Tusk Bond Fan Club

November 11, 2012

PIMCO Germany Portfolio Management MD Andrew Bosomworth

Andrew Bosomworth, head of Pacific Investment Management Co. (PIMCO) portfolio management in Germany. Photographer: Dmitry Beliakov/Bloomberg

The rally that sent Poland’s bond yields to record lows has further to run as the country’s economy and relatively lower debt make it a favorite among emerging markets for the world’s biggest investors.

Andrew Bosomworth, managing director at Pacific Investment Management Co., which oversees the globe’s biggest bond fund, called Poland “the blue-chip emerging market.” Polish bonds “look attractive in the current environment,” Beata Harasim, a money manager at BlackRock Inc., the largest fund company.

Lured by interest rate and budget deficit cuts, investors have been buying Polish debt and held a record 35 percent of zloty bonds on Sept. 30, Finance Ministry data show. The yield on the government’s 10-year zloty bonds tumbled 169 basis points this year to a low of 4.20 percent on Nov. 9, on track for the biggest rally in a decade, while euro notes have been narrowing the premium gap with Germany.

“There is some on-going scope here for Polish bonds to provide good returns,” Bosomworth said in an interview in London on Nov. 8. “In so long as Poland keeps on doing what it has been doing, then even the local currency bonds could deliver respectable returns.”

Asian Buyer

Kokusai Global Sovereign Open (1131197C), Asia’s biggest fixed-income fund, last month bought Polish government bonds for the first time because of lower debt than in the euro region. Public debt amounted to 56.4 percent of gross domestic product in 2011, compared with an 87.3 percent-average for the 17-nation euro area, based on figures from Eurostat.

The yield on Poland’s euro-denominated notes due in 2020 fell 293 basis points this year, reducing the premium over similar German bunds to 130 basis points, compared with a 372 point gap on Dec. 31, according to data compiled by Bloomberg.

The government of Prime Minister Donald Tusk will narrow the budget deficit to 3.1 percent of GDP next year after it raised the retirement age, froze public sector wages and cut some spending, the European Commission said on Nov. 7. The gap stood at 7.9 percent in 2010.

The economy will slow to 1.8 percent next year from 2.4 percent in 2012 as the euro area, Poland’s biggest trading partner, contracts, according to EU’s executive.

“Poland’s ability to balance growth and fiscal discipline is a very strong point supporting the local bond market,” Harasim said in a phone interview from London on Nov. 8. She helps oversee the equivalent of $34 billion in European fixed- income assets for New York-based BlackRock.

‘Easing Cycle’

Policy makers are taking steps to prop up the economy. The central bank cut interest rates on Nov. 7 for the first time since 2009 in what Governor Marek Belka called the start of an “easing cycle” to spur growth. The government plans to spend about 300 billion zloty ($92 billion) on investments by 2020 while pledging to keep fiscal goals intact.

Slowing economic growth and the prospect for more rate reductions have weakened the zloty by 2.1 percent in the past month, the biggest decline among 31 major currencies tracked by Bloomberg after the Indian rupee. A weaker zloty diminishes returns for any foreign buyers of bonds who don’t protect themselves against currency swings.

Zloty bonds carry “greater risks” than Poland’s foreign currency-denominated debt because the currency may “come under pressure” in “risk-off environments,” said Bosomworth.

‘Fairly Valued’

The currency “looks very close to being fairly valued” and “in the short-term it will be driven by weaker growth prospects not only in Poland but in Europe,” according to Harasim. Poland sells 54 percent of its exports to the euro area, including 25 percent to Germany, government data show.

The extra yield investors demand to hold Poland’s government dollar bonds rather than U.S. Treasuries fell one basis point, or 0.01 percentage point, to 122 on Nov. 9, indexes compiled by JPMorgan Chase and Co. show.

The additional yield on Polish 10-year zloty bonds over bunds narrowed 10 basis points to 283 on Nov. 9, the lowest since July 2011. The zloty gained 0.3 percent to 4.1570 against the euro on Nov. 9, paring last week’s loss to 1.1 percent, according to data compiled by Bloomberg.

The cost to insure Polish state debt against non-payment for five years using credit-default swaps rose four basis points to 90, data compiled by Bloomberg show. The swaps cost 94 basis points less than the average for countries in eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index, compared with an average 78 basis-point difference in the first half of 2012. Default swaps decline as the perception of credit worthiness improves.

‘Risk-On’ World

The yield on Poland’s 2020 euro bonds fell to a record low of 2.32 percent on Nov. 9, compared with 1.02 percent yield on eight-year German bunds, prices compiled by Bloomberg show.

Polish bonds are appealing as the country’s “fundamentals are still supportive, with the risk of recession being very low,” Harasim said. The economy of the 27-nation EU is expected to contract 0.3 percent in 2012 before expanding 0.4 percent next year, according to European Commission forecasts last week.

“We are in a world now where things are now either risk-on or risk-off,” Bosomworth said. “If Europe moves forward, and I think they are doing that -- it’s two steps forward, one step back, but I think the momentum is forward -- then that’s going to be beneficial for emerging markets.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw at

To contact the editor responsible for this story: Gavin Serkin at

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