Polish bonds: surge in 10-year yields shows high anxiety

The yield demanded by investors to lend long term to the Polish government has come off its recent peak, but anxiety levels remain high. Concerns about economic policy and Warsaw’s fractious relations with Brussels are likely to keep it that way.

Poland is a country where fiscal fragility induced by the strong dollar threatens to exacerbate political instability in a dangerous border zone. It is hardly alone in this respect.

The yield on the government’s 10-year domestic bonds topped 9 per cent in late October. At 8.4 per cent today, it remains at a level last seen 20 years ago. Yields have more than doubled this year with most of the rise in the past three months.

Investors have multiple concerns. One is that the central bank called an end to its tightening cycle last month with its policy rate at just 6.75 per cent, far below the rate of inflation. Consumer prices rose by more than 17 per cent in the year to September. 

The bank said it was concerned about the slowing pace of GDP growth. The decision caused dismay on markets and prompted a public row among members of the bank’s monetary policy committee. One dissenting member warned on Wednesday that inflation could reach 24 per cent next year.

Investors worry that policymaking is driven more by the government’s desire to win re-election next year than fixing economic problems. Ministers have promised pay rises and tax cuts despite a widening budget gap.

Warsaw risks losing access to EU funds because of moves to bring the judiciary under political control. The policy mix smacks of populism at a time when Poland can little afford it.

Early this year, yields on Poland’s short-term bonds rose faster than those on long-term bonds. Buyers believed higher interest rates today would bring down inflation tomorrow. That 10-year yields have since risen sharply suggests lower confidence in the future.

Poland’s government debt is a relatively low 55 per cent of GDP. But investors fear the government cannot deliver primary surpluses big enough to stop a rapid expansion. Warsaw’s politics suggests they are right.