Poland joins negative yield club

Poland has become the first emerging market to sell debt at a negative yield, underscoring the relentless decline of borrowing costs in global markets.

The Swiss franc-denominated SFr580m three-year bond will pay no coupon and yielded minus 0.213 per cent, swelling the growing pool of negative yielding government debt in Europe.

Since the European Central Bank unveiled its landmark sovereign bond-buying programme this year to stoke inflation and stimulate growth in flagging eurozone economies, prices in bond markets have soared, sending yields to record lows.

Several highly rated European sovereigns have already sold bonds with negative yields but emerging market governments have up to this point been unable to tempt investors in similar fashion.

Poland is rated six notches below Germany’s triple A Standard & Poor’s rating but the aggressive loosening of monetary policy in Europe has fuelled unprecedented demand for fixed income, driving yields down in riskier assets.

The ECB’s decision to cut rates and launch quantitative easing also led to a steep drop in the euro against rival currencies, pushing central banks across Europe to cut interest rates in response.

Poland had previously tapped the Swiss franc bond market to expand its investor base.

Since the Swiss central bank slashed its deposit rate to minus 0.75 per cent earlier this year — the lowest in the world — it has become an even more attractive market for prospective borrowers.

“It’s the biggest issue ever printed with a negative yield in the Swiss franc market, which is a great success for Poland,” said Fabian Welandagoda, director of local currency syndicate at HSBC.

Warsaw’s bond was snapped up by international bondholders including Swiss investors, for whom a yield of minus 0.213 per cent is a significant premium on the minus 0.75 central bank deposit rate.

Fixed income investors have quickly acclimatised to the new reality of negative yielding government bonds in Europe.

“Negative yields are a taboo that has long been broken,” said Michael Riddell, fund manager at M&G Investments.

“With European deposit rates at minus 0.2 per cent and the lowest yielding German bond at minus 0.28 per cent, the market is just looking for a pick-up over that.”

Earlier this month, Switzerland became the first country to sell benchmark 10-year debt at a negative yield, and sub-zero yielding bonds now account for about a quarter of Europe’s entire government debt market.

In March, Poland cut its main interest rate 50 basis points to 1.5 per cent, the lowest level on record. However, it has closed the door to further easing, citing robust economic growth.

In a further sign of the relentless investor appetite for fixed income in Europe, Cyprus sold €1bn of seven-year debt on Tuesday with a coupon of 3.875 per cent, attracting offers close to €2bn from investors struggling to find positive yields elsewhere in Europe.