(Bloomberg) -- Polish bonds are rallying more than Treasuries as expectations of faster and deeper monetary easing in the US fuel bets that Warsaw’s still hawkish policymakers will also tilt toward rate cuts.
Known as POLGBs, Poland’s local-currency government notes are Europe’s best performers over the last month. The extra yield investors demand to hold 10-year zloty-denominated bonds over similar-dated Treasuries fell to the lowest level since May this week.
Unlike other major central banks in eastern Europe, the National Bank of Poland has refrained from reducing interest rates in 2024. In fact, Governor Adam Glapinski favors keeping rates on hold until 2026, a view which may be upended if the Federal Reserve cuts sharply in a bid to engineer a soft landing for the US economy.
“It will be difficult for the NBP to resist cutting” if the reductions that are currently priced in for developed markets happen, said Viktor Szabo, an emerging-market fund manager at Abrdn Plc. With underlying inflation supporting some easing, Poland is showing “probably the largest gap in market pricing versus central bank communication,” he said.
The yield on Poland’s 10-year bonds fell by as much as 56 basis points since July 26 — the biggest decline among European peers — and hit a 2024 low of 5.06% earlier this week.
The drop comes as Poland seeks to sell as much as 9 billion zloty ($2.3 billion) in notes at its nearest auction on Aug. 21. Latest Finance Ministry data shows that foreign holdings of POLGBs has jumped by 5 billion zloty in June — the biggest monthly increase since mid-2022.
Rate Cut Bets
Derivatives used by traders to bet on Polish rate levels also reflect the growing chances for monetary easing. Six-by-nine month forward-rate agreements show bets on 50 basis points of cuts, while nine-by-12 month FRAs indicate wagers for about 100 basis points in easing.
“The current market pricing is showing increased odds of a sooner and sharper easing of monetary conditions, despite the still-hawkish communication by the central bank,” said Marek Drimal, a strategist at Societe Generale SA in London. “This also contributes to the rally in Polish bonds.”
To be clear, Abrdn’s Szabo said that increased pre-US election market volatility could still allow the Polish central bank to keep rates steady.
Elsewhere in eastern Europe, Hungary has slashed its base rate by 6.25 percentage points in a yearlong easing cycle, while the Czech Republic reduced its benchmark by 2.5 percentage points since December. Even Romania, which has one of the highest inflation rates in the European Union, cut rates in July and August.
(Updates with bond auction plans and foreign debt holding data in sixth paragraph.)
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