In March the positive trend in the government bond market, which took place in February was continued. Throughout the month, all securities across the yield curve gain in price and yields fell. 10-year benchmark decreased by about 16 basis points last month, 5-years by about 15 basis points and 2 years by 9 bp. In March Polish Zloty strengthened against the euro.
The increase was about 1,3% over the month. The main factors which influenced the quotations Polish bonds in March were external information and events. Very important was the invasion of the Russian army in the Crimea – the territory belonging to the Ukraine. The most important consequence of the annexation of the Crimea was to reduce forecasts for Polish GDP growth of about 0.4% – 0.6%, which was the result of estimates relating to the implementation of economic sanctions for Russia and less trade with Russia in the future.
Good sentiment on the bond markets was supported by a continuation of positive trends of Italian, Spanish and Portuguese bonds.
The most important internal factor were very dovish comments of members of the Monetary Policy Council. Most of March KBC Renta Zloty was slightly overweighted in comparison to the benchmark. For the first two decades of February overweight was approximately 105%. In the last week of the month duration was limited. Duration in relation to the benchmark at the end of month was around 103%. Activity in the primary market was high. All auctions of bonds organized by the Ministry of Finance were successful. Ministry of Finance sold bonds worth 11,38 billion PLN at a demand reaching 16,2 billion (3.8 bln OK0716, 2.7 bln PS0718, 2.1 bln DS1023 and 2.8 bln WZ0119 (floater)).
The macroeconomic data announced during the month were positive for the economy. PMI manufacturing was 55,9 higher than forecasts and previous data (55,4). Industrial production for January was below expectations (5,3% y/y vs 6,1% forecast), but higher than in the previous month (4,10% y/y). Retail sales was better than forecasts (7,0%y/y vs 5,5%). The unemployment rate remained high at 13,9 % and was slightly worse than forecasts. Inflation has been maintained low. In February CPI y/y was 0,7% – lower than expected and still below the lower limit of the inflation target 1.5% of Polish National Bank. It allowed Polish Monetary Policy Council to keep interest rates unchanged. At the February meeting the Monetary Policy Council did not change interest rates.
Our expectations regarding the situation on the market are slightly positive. We expect a continuation of the economic recovery in the euro area without a significant increase of inflation. This means the continuation of expansionary monetary policy by the ECB. An additional obstacle, which can adversely affect the European economy is the annexation of Crimea by Russia. This will have a negative impact on Russia’s balance of trade with Western Europe. The fiscal situation in Poland remains stable. The reform of the pension funds taken by the Polish government will reduce the public debt. After March the government’s borrowing needs for the year 2014 are covered at 70%! The threat to this scenario is uncontrolled development of events in Ukraine. The escalation of military action by Russia in Ukraine may raise foreign investors’ concerns and lead to increased sales of Polish bonds. However, in our opinion, the probability of extremely negative scenario in this case is very small.
