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Poland Risks Bondholder Upset If Easing Ignores Market Mood: RBS

June 13, 2013

Poland risks a pullback from foreign bondholders if its monetary policy easing cycle fails to show cognizance of swings in debt market sentiment amid record-low interest rates, according to Royal Bank of Scotland Group Plc. (RBS)

The yields on the Polish government’s 10-year bonds plunged to a record 3.07 percent last month before the Monetary Policy Council cut interest rates by 25 basis points, or 0.25 percentage point, to an all time low of 2.75 percent on June 5. The move brought reductions since November to 200 basis points as the euro-area debt crisis curbed Poland’s first-quarter growth to its weakest since 2009 and the inflation rate grew at the slowest pace in seven years.

“We may see Polish policy makers exercise more caution in considering further monetary easing, given the high vulnerability of the local bond market to swings in market sentiment,” Phoenix Kalen, an economist who covers Central Europe, Middle East and Africa at RBS, said in an interview in Warsaw late yesterday. “It is important to maintain high real interest rates to attract continued inflows.”

Emerging market bonds and currencies have tumbled since May 22, when Federal Reserve Chairman Ben S. Bernanke said policy makers could scale back the pace of bond buying if they saw a sustained improvement in U.S. economy. The purchases have helped feed a rally in emerging market assets, as investors looked for higher yield. Poland’s 10-year bond yield fell five basis points to 3.85 percent at 1:13 p.m. in Warsaw, 45 basis points above levels from before Bernanke’s statement and 78 basis points over a record low reached on May 9.

Caution Needed

Foreign holdings of Polish government bonds were unchanged in May compared to the end of April, when they rose to record 207.1 billion zloty ($64.9 billion), or 37.9 percent of the total, deputy Finance Minister Wojciech Kowalczyk said on June 10, adding long-term investors were not leaving Poland. Rate-setter Elzbieta Chojna-Duch said last month that further cuts should be “cautious” as the central bank needs to maintain a “safety cushion” to protect against the risk of a pullout by foreign investors in Polish bonds.

Overnight index swaps show there is a 90 percent probability the rate panel will trim interest rates by 25 basis points at its next meeting on July 3. Three-month forward-rate agreements traded 17 basis points below the Warsaw Interbank Offered Rate, showing scope for no more than a quarter-point reduction.

“A cut in July is still on the table,” RBS’s Kalen said. “However, if the central bank fails to cut in July, it will signal their deep concern about the deteriorating external environment,” she said.

To contact the reporter on this story: Maciej Onoszko in Warsaw at

To contact the editor responsible for this story: Wojciech Moskwa at

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