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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.