BRE Bank on Polish fixed income: Rate cut
November 9, 2012
After the huge surprise in October the RPP managed to start a
monetary easing cycle in November with 25bp cut in all rates.
The broadly expected decision that should have triggered the
profit-taking opportunity resulted in further plunge of the yield
curve driven by strong buying in 10y bonds sector. The awkward
trades had distorted the whole yield curve by pushing 2y-10y
spread down from +20 to +7 points, which looked completely out
of control and had no reasonable and economic background.
It turned out that stop-loss procedures always follow its own
rules. The short end of the curve also suffered but the scale of
moves looked quite limited as the Wibor rate fell only by 5bps
and the FRA contracts have already priced a total of 150bp cuts
in a cycle with a perfect 15bp-20bp dropdown along monthly
forwards. We do not see any further value in these levels. As
the market looks like stopping losses along the curve, we would
grab an opportunity to occasionally pay the bottoms and seek
the opportunity to trade towards a steeper curve that should
be a more natural long-term strategy anyway. Actually, we
were one of the few who believed in a further slowdown of the
economy and were expecting 125-150bp interest rate cuts in a
whole cycle (our most dovish competitors bet for up to 75bp).
We took all that happened last week as a fully priced market
scenario with no further real market value to receive.