The conflict in the Middle East, whose main economic impact is the blockade of the Strait of Hormuz, which is crucial for the export of energy resources such as oil and gas, has driven up the prices of these raw materials. This is already reflected in accelerating inflation and raises fears that the prices of consumer goods and services will escape the control of central banks.
This causes the financial market to start pricing in interest rate increases by central banks around the world. Poland was also affected by this, as can be seen in the increase in profitability (fall in prices) of treasury bonds.
Yields are the highest in 15 months
On Monday, the yield of Polish treasury bonds continued the large jump from Friday and in the case of 10-year securities increased to 5.97%. This means an increase of almost 9 basis points (bps) in one day and 19 bp in two sessions. The current yield levels on these Treasury debt securities are the highest since January 2025.when NBP interest rates were 2 percentage points higher than now. A few sessions after the attack on Iran, the profitability increased at an extraordinary pace for several days, by almost 1 percentage point. Typically, changes of this scale take at least a few months.
An increase in yield means a decrease in the price of bonds. Although the vast majority (about 70 percent in the case of PLN issues) of our “treasury bonds” have a fixed interest rate, the increase in market profitability is bad news for the Ministry of Finance, because new series will be sold to investors with a higher coupon, which means it will be more expensive for the state. You can also look at it differently: a decline in bond prices means that to achieve the same goals, the Ministry of Finance must issue more securities.
PKO BP economists wrote in Monday's report that a significant new challenge for public finances is the persistence of higher yields on treasury bonds caused by global uncertainty, which particularly affects emerging markets such as Poland.
The yield on 10-year Treasury bonds jumped after the outbreak of war in the Middle East.
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Stooq, own study
They wrote that although in the first year it should not translate significantly into debt servicing costs, within a two-year horizon the effective interest rate on public debt would increase by 1 percentage point. increases these costs by 0.3-0.4 percent. GDP.
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The increase in debt servicing costs would be a gradual and spread over time process. The government pays higher interest rates only on newly issued bonds, and the average cost of debt increases gradually as maturing securities are refinanced. New securities, issued with a higher coupon, would slowly enter the pool of debt, which amounts to approximately PLN 760 billion due to treasury bonds. The problem would be more acute if the increased yields on listed bonds lasted longer.
The current situation makes it difficult to normalize the budget
“However, the prospect of returning to fiscal balance is gradually becoming more distant. Lower deficit estimates for 2025, combined with higher nominal GDP growth and the negative impact of the weakening Polish zloty, lead to a slight reduction in the debt forecast, which, however, will clearly exceed 60 percent of GDP in 2026. Growing tensions in public finances limit the fiscal space to respond to negative shocks,” PKO BP experts added.
