Putin Cabbage Ban No Match in Poland for Fed Rate Concern

By Maciej Onoszko

Photographer: Andrey Rudakov/Bloomberg

Vladimir Putin, Russia's president, banned Polish fruit and vegetable imports,... Read More

Polish government bonds fell at the fastest pace in six months as speculation the economy needs fresh monetary stimulus is overshadowed by concern over the timing of U.S. interest-rate increases.
The yield on 10-year government debt surged 30 basis points in the final three days of last week, the biggest jump since January, according to data compiled by Bloomberg. The yield dropped three basis points to 3.44 percent by 9:24 a.m. in Warsaw. The premium investors demand to hold the bonds instead of equivalent German bunds dropped today after widening to the most since May last week.
The economy is starting to waver amid the first contraction in manufacturing in more than a year. Russian President Vladimir Putin also banned Polish fruit and vegetable imports, including apples and cabbage, in response to European Union sanctions. While the headwinds have fueled speculation policy makers will cut borrowing costs, attention has shifted to when the Federal Reserve will raise rates.

“The market is getting nervous on stronger U.S. growth numbers since it moves forward the first Fed hikes,” Lars Peter Nielsen, a fund manager at Kolding, Denmark-based Global Evolution AS, which oversees about $2.2 billion, said by e-mail on Aug. 1. “In the short-term, global factors are definitely weighing” on the bond market, he said.

Fed Timetable

U.S. policy makers last week reduced monthly asset purchases by $10 billion to $25 billion, leaving them on pace to end in October. They repeated they’re likely to keep rates low for a “considerable time” after stimulus ends.
Poland’s purchasing managers’ index declined to 49.4 in July from 50.3 in June, Markit Economics Ltd. said Aug. 1, missing the 50.5 median estimate of 14 economists surveyed by Bloomberg. A reading below 50 indicates contraction. The PMI data followed reports on June industrial output, wage growth and retail sales that also trailed behind forecasts.
“The weaker-than-expected PMI should be theoretically positive for bonds, but external factors have been the key driver for the local bond market,” Esther Law, who helps oversee the equivalent of $249 billion as a fund manager at Pioneer Global Investments Ltd. in London, said by e-mail on Aug. 1.
Shorter-maturity bonds are less “vulnerable to further repricing” than longer-dated securities “should U.S. monetary policy start to normalize in the medium term,” Law said.

Damping Growth

EU governments agreed last week to bar Russia’s state-owned banks from selling shares or bonds in Europe and restrict exports including oil industry equipment. Russia’s ban affects a market worth about 1 billion euros ($1.3 billion) a year, according to Polish government data.
The sanctions will damp Poland’s economic growth by 0.6 percentage point in 2014, Deputy Prime Minister Janusz Piechocinski told newspaper Rzeczpospolita on Aug. 1. The expansion is seen at 3.6 percent this year and next, according to the central bank’s projection published in July, when policy makers kept their main rate at a record low 2.5 percent.
The bond market may be “supported” by Russia’s ban, which will boost “deflation pressure and increase the likelihood of even a 50 basis-point rate cut,” Pawel Radwanski, an economist at Bank BGZ in Warsaw, said in a note July 31.
The yield on Poland’s 10-year bonds decreased two basis points to 3.45 percent, curbing the spread over similar-maturity German bonds to 232 basis points after rising to the most since May 21. The zloty weakened 0.2 percent to 4.1768 against the euro at 9:20 a.m. in Warsaw.
“We don’t think that the recent pullback is anything but a sensible correction,” Paul McNamara, a fund manager who oversees $6.5 billion in emerging-market debt at GAM U.K. Ltd. in London, said by e-mail Aug 1. “The U.S. gross domestic product and the Fed” are the main drivers for bonds, he said.