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Falling U.S. Yields Lure Emerging Europe's Biggest Issuer

Falling U.S. Yields Lure Back Emerging Europe's Biggest Issuer

(Bloomberg) -- The last time Poland sold bonds in dollars three years ago, Treasury yields were headed toward record lows. As U.S. borrowing costs plummet again, Europe’s biggest emerging-market issuer wants to reconnect with its old friends across the Atlantic.

The investment-grade sovereign, which neighbors the euro region, has preferred selling foreign bonds denominated in the single European currency in past years. With U.S. yields spiraling downward, Poland is waiting for the cost of issuing in greenbacks -- and swapping the proceeds into zloty -- to be comparable with euro bond costs, according to Deputy Finance Minister Piotr Nowak.

“Our last dollar issuance took place in 2016,” Nowak said in an emailed reply to questions from Bloomberg. “It’s been some time, but we still want to be present on this key market and be able to offer U.S. investors bonds in their own currency.”

Falling U.S. Yields Lure Emerging Europe's Biggest Issuer

Emerging-market issuers are tempting global investors with hard- and local-currency debts sales as the prospect of looser monetary policy in the U.S. stokes a hunt for yield. Nowak’s comments about potential dollar issuance come amid a rally in Poland’s local-currency bonds that’s seen them recover from concerns election-year fiscal stimulus could destabilize the budget.

In March 2016, Poland sold $1.75 billion of 3.25% coupon 10-year dollar bonds. The yield on these notes tumbled more than 120 basis points this year to hit a record low of 2.36% on Monday. Nowak said the ministry would consider bonds in dollars, euros and potentially other currencies, depending on market conditions.

Scarcity Factor

Should Poland go ahead with the sale, it could benefit from the fact that its issuance in dollars has been comparatively rare. The government is seeking to gradually reduce its reliance on foreign debt, and non-zloty bonds declined to 28.9% of the sovereign’s total in March 2019 from 34.4% at the end of 2016, according to Finance Ministry data.

About $2.2 billion of Poland’s 6.375% dollar bonds are due on July 15, posing the biggest payment wall for the sovereign until 5.25 billion euros ($5.9 billion) of Eurobonds mature in April 2020, according to data compiled by Bloomberg.

Poland has about $257 billion of state debt, more than Russia and Turkey and about the same amount as Austria and Portugal. Nowak’s dollar notes, however, have been anything but star performers. Investors gained 5.5% by holding them this year, one of the worst showings in the Bloomberg Barclays EM USD Aggregate Total Return Index, which as a whole returned 9% so far in 2019.

At the same time, Poland wants to continue reducing supply at domestic auctions by focusing on switching tenders instead of outright sales. At switches, the finance ministry offers longer-dated bonds in return for notes maturing within months. This has helped curb the supply of zloty bonds in past months.

To contact the reporter on this story: Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Wojciech Moskwa, Robert Brand

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