Poland Bonds Remain the ‘Bunds’ of Central Europe, Debt Chief Says 

Poland may return to international bond markets before the year-end in an effort to pre-finance a surge in 2024 borrowing needs, according to the country’s debt chief.

(Bloomberg) — Poland may return to international bond markets before the year-end in an effort to pre-finance a surge in 2024 borrowing needs, according to the country’s debt chief.

Karol Czarnecki, who heads the finance ministry’s public debt department, expects strong demand from foreign investors. He dismissed concerns about the country’s widening deficit, saying it still compares favorably against other European emerging markets.

“Since I’ve been meeting with investors, Polish bonds have maintained their image as the Bunds of central Europe,” Czarnecki said in an interview. “This positive perception doesn’t change.”

Poland will need to increase its net bond sales by 160% next year to finance a military buildup and spending pledges made by the ruling party before a parliamentary election on Oct. 15. While the yields on the country’s government bonds have risen in recent months, the prospect for more debt supply isn’t causing “particular worries” for fixed-income investors, Czarnecki said.

Polish bonds have lagged average emerging-market debt returns in the second half of 2023. Local-currency notes have given a negative 5.1% dollar-term return, compared with a 1.8% loss on developing-market debt. Meanwhile, the sovereign’s dollar debt dropped 5% compared with a 3.8% decline by its peer group.

The government will continue to keep at least 75% of its bonds denominated in the zloty even as the government plans to rely more heavily on foreign financing next year, he said. Currently, about 22% of the sovereign’s notes are in foreign currencies.

Czarnecki wouldn’t specify the denomination and location of potential bond issues, saying the decisions will be based on market developments. Poland last tapped international markets in March, selling a combined $5 billion of bonds due in 2033 and 2053. The extra yield on Poland’s 10-year notes over Treasuries has increased to 129 basis points from as little as 104 basis points in August.

Zloty Bull

With weeks to go before the election, investors have been unnerved by an unexpectedly large interest-rate cut in September, which sent the zloty into its biggest slide since Russia’s invasion of Ukraine.

The government has since stepped in to warn it can intervene to stabilize the currency. The central bank also pledged to be more cautious with future rate cuts. Its next decision is on Wednesday. 

The zloty’s weakening isn’t impacting the country’s main “buy-and-hold” bond investors, Czarnecki said. He forecast the currency will eventually return to around 4.4 per euro, a 5% appreciation compared with where it traded on Tuesday. 

He denied the finance ministry was trying to deliberately keep the cost of zloty funding high to fend off short-selling by foreign investors, as suggested by Pawel Borys, an adviser to the prime minister. The cost of basis swaps should decline, Czarnecki said. 

Last month’s slide is a “technical adjustment” to an unexpectedly deep interest rate cut by the central bank, according to Czarnecki. Nevertheless, the zloty remains buoyed by Poland’s balanced current account and inflows of foreign-direct investments.

“The election period may be a time of greater volatility,” he said. “However, in the long term, I think the 4.4 level is close to equilibrium.”

–With assistance from Srinivasan Sivabalan.

(Updates with Poland’s last Eurobond sale from the seventh paragraph.)

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