The last six months were a period characterized by a large increase in the volatility of bond prices. In the first period, between the beginning of April 2013 and the first week of May 2013, prices of Polish bonds grew. At the beginning of May, yields across the curve reached this year’s lows: two-year (2Y)bonds reached 2.48%, 5Y reached 2.55% and 10Y 3.05%.In the second period, between the second week of May and the third week of June this year, Polish bond prices fell. The correction began in the last week of June, which ended in the third week of July. In the next period, from late July to early September, there was another big sale of bonds. In early September, bond yields reached this year’s peaks. Yields rose to the following levels: 2Y-3.25%, 5Y-4.35%, 10Y- 5%. The next two weeks of September were fairly good, though yields fell. Taking the period as a whole (the second and third quarters of 2013), yields rose: 2Y bonds by about 7 basis points, 5Y by about 35 bps and 10Y bonds
by about 57 bps.
In the period April 2013-September 2013, the Polish zloty weakened against the euro by about 1.1%. Factors that influenced investors’ decisions can be divided into external and internal. The external factors that drove debt-market sentiment were the activities of central banks (the Bank of Japan and the Fed). In the first period, we observed very good sentiment for bonds in the global markets. The main reason for this was the Bank of Japan’s decision to increase the purchase of assets above 700 billion USD and increase the scale of asset purchase funds linked to the Japanese property market. In
the second period, we observed a sudden deterioration in sentiment for bonds in the global markets, mainly due to good macroeconomic data, mainly from the US, and the Federal Reserve’s announcement that it was going to scale down its quantitative easing programme. The internal factors focused on the Polish economic data, especially inflation and interest-rate policy as fixed by the Monetary Policy Council. The macroeconomic data announced during the first period was negative and therefore supported demand for Polish bonds. PMI manufacturing dropped to 48. CPI inflation year on year was 1.0%, significantly below the 1.5% lower inflation target set by the Polish National Bank. In addition, industrial production was weak in March (-2.9% year on year, against -1.5% forecast). The reading for retail sales was also lower than forecast (0.1% against an expected 1.7%). In June 2013, CPI inflation reached 0.2% year on year, significantly below the Polish National Bank’s lower inflation target of 1.5%. This was the lowest inflation rate in Poland’s history. In the following months, be
tter data started coming in on the Polish economy. In September, PMI manufacturing was 52.6 higher than forecast
and previous data (51.1). CPI inflation year on year was 1.1% – in line with expectations. Industrial production for August was good (2.2% year over year). Retail sales were better than forecast (3.4% year over year against 3.0%). Monetary policy supported the debt market. Starting in May 2013 to July 2013, the Monetary Policy Council cut interest rates three times by a total of 75 basis points. Thus, interest rates in Poland reached a historical low at 2.5%. The July meeting of the MPC announced that this would be the last in a series of reductions.
The main component of the portfolio was Polish government bonds – 99.38%. Corporate bonds accounted for a very small percentage (just 0.62%). From April to May 2013, the portfolio of KBC Renta Zloty was overweighted in comparison to the benchmark – about 110%. At the end of May 2013, its duration was adjusted to the benchmark. In June, its duration was in
creased again – in relation to the benchmark, it was around 106%. In the second half of July, duration was reduced to the neutral. Between April and September, portfolio duration was still balanced around the benchmark. The selection has brought moderately positive results. At the beginning of the period under review, the duration of the portfolio was built mostly using instruments at the long end of the curve. In July, this was changed and the most overweighted maturity segments were 2Y to 5Y and 10Y to 20Y. This proved to be a good move. The result for the two quarters under review (the second quarter and third quarter 2013) was better than the benchmark. The difference calculated as unit value and benchmark adjusted for costs was
26 bps. We maintain neutral market expectations. The fiscal situation in Poland remains stable, despite the government deciding to increase the deficit by 16 billion PLN. Government borrowing needs are nonetheless covered to the extent of about 91%. Poland should still develop quickly enough to be above the European average. However, if there are further rises in yields in the US and EU, there will be pressure to increase Polish bond yields, especially in the case of large outflows from bond funds.
