Poland mulls Inflation-linked bond

Poland's finance ministry is mulling a long-term inflation-linked treasury issue possibly this year aimed at the country's nascent private pension fund industry, a senior ministry official said last week. Such a bond would be the first allowing institutional investors to hedge against inflation risk in Eastern Europe's large economies since the mid-1990s - when both Poland and Hungary issued similar but shorter-term paper. Inflation-linked debt typically carries lower yields and is thus less costly to the issuer than plain bonds, because its protection against price growth through rising coupon payments, or underlying capital, reduces risk premiums. Polish inflation, now at 3.3% year on year, is expected to hover around 4% over the next year. However, official interest rates are at a much higher level with the minimum 28-day intervention rate standing at 9.5%. "Many OECD countries are increasingly interested in debt linked to inflation and we are now also considering the viability of such an instrument," said Anna Suszyńska, deputy head of the ministry's public debt department, referring to the Organization for Economic Cooperation and Development.

Poland's treasury market, whose outstanding debt amounts to some zł. 108 billion ($27 billion), now comprises popular fixed-rate two-and five-year paper, floating and fixed-rate 10-year and 20-year notes. "In a couple of weeks we will begin consultations with potential investors and if we see sufficient demand potential, such bonds may be offered this year," she said in an interview. Suszyńska said it was not yet clear whether the bond's coupon or the principal would be indexed to the consumer price index or what maturity the paper would carry. "The maturity would be at least 10 years. The international standard is 10, 15 or 30 years," she said. The ministry hopes the bonds would be snapped up by private pensions funds, which were created a couple of years ago and now have roughly zł. 14 billion ($3.5 billion) invested in state debt. Suszyńska said expectations of investor demand worth zł. 3 billion ($750 million) annually would be enough to start the sales. "We cannot totally rule out inflation shocks in Poland bigger than in developed economies but in terms of these bonds, everything depends on the price," said a manager at a large foreign-owned pension fund in Warsaw. "At least in the beginning, such bonds would have to carry yields similar to currently-issued bonds," he said. - Reuters