Page 20 - Poland Outlook 2024

quotes of the zloty and the stock market, has a chance to manifest itself in the bond market as well. Foreign investors, whose current share in the portfolio of Treasury bonds is the lowest in history (13.7% of the entire portfolio of Treasury bonds), may—contrary to the trends of recent quarters—decide to enter the Polish bond market. In light of expected changes in monetary policy, for example, in the Czech Republic (aggressive interest rate cuts in 2024), the yield of Polish bonds may prove attractive to basket investors.
Among the risks to the outlook, there is the fact that 2024 will be the year of two elections: local (in April) and European (in June). While not as fundamnetal as the general election, both plebiscites are likely to result in a new race of more or less populist promises, as the Tusk government will be wary not to give PiS momentum ahead the presidential election in 2025, the crucial political moment in the near term.
As for the expectations on yields, Bank Millennium writes in an analysis, for over a year, the yield of Polish government bonds has been in a declining trend that will be maintained in 2024.
“Currently, the key factor supporting the decline in yields is the reshuffling of market expectations regarding future decisions by the Federal Reserve and the European Central Bank,” Bank Millenium wrote.
Investors anticipate a quick transition to interest rate cuts in the US and the eurozone (by mid-2024), which will also affect the valuation of the Polish debt market.
In effect, the “expectations for 2024 assume that the trend of declining yields of government securities will be maintained. However, the extent of the decline will be significantly smaller than in 2023 due to the discounting of several positive factors for debt valuation,” according to Bank Millennium.
First, that is because of the unclear path of monetary policy in Poland, with analysts expecting a reduction of maximum 100 basis points throughout 2024. Also market expectations regarding the prospects for the monetary policy of the ECB might be seen as too aggressive, which may limit the potential for a decline in the yield of Polish debt from the core markets.
At the same time, support – albeit small – of declining yields may come from changes in asset swap rates, Bank Millennium also says.
“We assume that the quotes of asset swap rates will decrease slightly in 2024, which will support the decline in yields, especially for long-term bonds. Although the budgetary situation in 2024 will likely remain difficult ... the government probably will seek some savings or use the liquidity cushion, similar to the previous government's amendment to this year's budget,” Bank Millennium wrote.
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