Rates are falling and Poland is paying higher interest rates. The market is taking advantage of the situation
The Ministry of Finance sold six series of bonds for a total of PLN 10 billion, with demand of PLN 15.8 million, the ministry said in a statement. For the first time, the Ministry sold three-year securities (NZ0928) based on the POLSTR index, an alternative to WIBOR, for PLN 1.48 billion with demand of PLN 1.9 billion.
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It is very good news that there is high demand for Polish bonds, because it proves that the Polish government has no problem with financing the deficit. However, the key thing is under what conditions it does so. And here's the worse news.
Interest is rising despite falling rates
The Ministry of Finance managed to obtain the largest amount – PLN 3.8 billion – from the sale of five-year bonds, and that was it with a profitability of 4.825%. annuallywhich means that the state will actually have to pay interest on the amount received. This is the same as at the auction on November 14, but more than at the auction on October 29 (4.797%).
The second largest amount (PLN 2.2 billion) was obtained from the sale of 10-year bonds and here the yield was 5.337%. annually. And here the conditions are slightly worse than the auction of November 14 (5.313%) and similar to the auction of October 29 (5.358%).
However, since the auction on October 29, there has been a meeting of the Monetary Policy Council (November 4), during which interest rates in Poland were reduced by 0.25 percentage points. As you can see, this had no impact on the bond auction. In other words, thanks to the rate cuts, the State Treasury will save on interest on retail bonds bearing interest at the NBP reference rate and those based on WIBOR, but it will not save on bonds sold wholesale to large investors.
Meanwhile, the issue of debt servicing costs is an increasingly important item in the budget. Until October, the state budget spent less than PLN 60 billion on debt servicing. This amounted to 8.5 percent. state expenditure and 12.7 percent state revenues. And the budget deficit planned for next year of as much as PLN 272 billion will force us to incur further large debts.
