4.3. Situation on the Treasury bond market

As expected by the Bank, 2014 proved to be a good year for the Treasury bond market while the final returns on Treasury bond portfolios considerably exceeded the most optimistic expectations. In practice, from the turn of January to February when the sellout of assets from emerging markets (including Poland) peaked, Treasury bond yields were on a decrease while their prices were on an increase. The factors which supported the Polish bond market in 2014 included: low inflation in Poland and beyond; concerns about economic growth of well-developed countries, initially fuelled with the surprising fall of GDP in Q1 and later by the eurozone flirting with yet another recession (which actually did affect some of the eurozone countries); expectations of the European Central Bank’s asset purchase programme which would result in an inflow of cash to the Polish bond market; expectations of further interest rate cuts followed by actual decisions to cut the rates; falling bond yields on the base markets, especially German bonds whose yields dropped by ca. 1.5 percentage points within the year.

The bond market was also supported by a steady improvement of fiscal indicators: according to estimates, the government budget was ca. PLN 20 billion (40%) lower that the target at the end of 2014 while the government sector deficit probably dropped below 3% of GDP. This implies an earlier than expected completion of the European Commission’s excessive deficit procedure and, in the mid-term, an upgrade of Poland’s ratings if public debt follows a downtrend (which is probable). The lower credit risk is combined with lower supply of Treasuries due to the government’s smaller borrowing needs in 2014.

In the opinion of the Bank, it is too early to announce that the downtrend of Polish T-bonds is over. Bond yields have hit new records in 2015 and bonds should keep strong in the coming months (at least in Q1). The factors that make Polish Treasury bonds attractive include: further fall of inflation (the Bank expects the lowest inflation readings at -1.5% in February and March); the low yield environment in Europe supported by the ECB as well as global drivers (inflation in well-developed countries will also bottom out in Q1).