Poland’s Central Bank Just Tanked the Local Bond Market

Poland’s central bank has repeatedly vowed to keep government borrowing costs low during the pandemic. Its quantitative-easing auction this week had the opposite effect.

The National Bank of Poland unexpectedly refused to buy 4.3 billion zloty ($1.2 billion) of government bonds that investors offered to sell on Wednesday, sending the local debt market into a tailspin.

The decision blindsided investors, sparking speculation that policy makers may be moving to wind down quantitative easing purchases and shifting their focus to fighting accelerating inflation.

Poland’s Central Bank Just Tanked the Local Bond Market

Just weeks earlier, Governor Adam Glapinski said he was expanding bond purchases and vowed that his institution has the tools to lower Poland’s debt-financing costs.

Despite the spike in yields, the central bank didn’t address the outcome of the auction in its communication this week and the press office declined to comment when contacted by Bloomberg.

The institution offered to buy as much as 5 billion zloty of eight series of bonds at the auction, which was its second this month. It ended up purchasing 2 billion zloty of less liquid quasi-sovereign notes.

“There are no longer any guarantees that investors will be able to sell their bonds to the central bank, at any price,” said Mikolaj Raczynski, the head of fund management at Noble Funds TFI SA. “The market will not forget about this auction for a long time.”

The yield on Poland’s five-year note jumped by a total of 13 basis points on Wednesday and Thursday. It stood little changed at 1.29% at 1:30 p.m. on Friday, up 36 basis points this month.

Tapering or Punishment?

Unlike other central banks, Poland makes its QE purchases not directly on the market but at auctions that usually take place once or twice a month.

The Monetary Policy Council hasn’t spelled out how long the program, launched last year in response to the pandemic, is going to last or what amount of bonds the central bank intends to buy.

Glapinski said earlier this month, though, that the QE will have to end before policy makers start to discuss raising interest rates.

That’s why the outcome of the auction left many searching for answers. ING Bank Slaski SA saw concerns that the central bank “has already begun the process of withdrawing from quantitative easing.” Morgan Stanley observes “initial signs that the central bank is starting to consider normalization” and expects QE purchases to stop by the end of the year.

On the other hand, Konrad Bialas, an analyst at TMS Brokers SA, said the market was “looking for a hidden message” that wasn’t there. Jakub Taborowicz, a debt portfolio manager at PZU TFI SA, one of Poland’s biggest mutual funds, said the reaction to the QE auction was exaggerated by the determination of sellers to get rid of government bonds rejected by the central bank.

He doesn’t expect the central bank to change its view on holding interest rates steady anytime soon.

As usual, investors staggered the prices of their offered bonds at the QE auction, trying to maximize returns. Yet the central bank rejected all bids, even those which were in line with market prices at the time, according to Noble’s Raczynski, who took part in the auction.

“This shouldn’t happen -- the central bank establishes the rules of the auction and investors adhered to them,” he said. “Did the central bank want to punish investors for seeking higher prices all of a sudden?”

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