Why Poland’s negative yield bond is still hot

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Bond markets have sold off globally, but there's an odd duck standout: the negative-yielding, Swiss-franc-denominated bond recently sold by Poland.

The bond was already a bit iconoclastic. Several developed markets, including Switzerland and Germany, had been getting paid to borrow money for a while, but Poland became the first emerging market to sell a negative yielding bond last week, raising around 580 million Swiss francs (558.7 million euros or $635 million) in a three-year issue that yielded a negative 0.213 percent.

But while the bond selloff last week saw some negative-yield issuers return to positive-land, Poland's bond price hasn't budged much. Switzerland's benchmark 10-year bond was yielding a minus 0.184 percent on April 20, but that turned to a positive 0.132 percent Thursday.

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Poland's three-year Swiss-franc bond yield hit a high of negative 0.143 percent last week, but was around negative 0.172 percent late Thursday. Bond prices move inversely to yields.

Poland has certainly managed to hit a sweet spot in bond demand, tapping buyers scrambling not just for Swiss franc-denominated issues, but also for Eastern European assets.

"[It's] just exploiting the investors desperate [enough] to accept comparatively low returns," said Markus Allenspach, head of fixed income research at Bank Julius Baer. He noted that institutional investors and banks need to fulfill their liquidity ratios and a franc-denominated sovereign-bond can fill the bill, even at a negative-yield.

"If you think it's crazy to buy bonds at this level, you have to see the alternatives," Allenspach said, noting Swiss banks must pay an even larger penalty to park funds with the Swiss National Bank (SNB), the country's central bank. (Tweet this.) The SNB has imposed a negative deposit rate of 75 basis points.

"[They can] buy something for the liquidity ratio, with a single-A rating that's expected to improve [and it] pays more than the SNB," he said. "[It's] no wonder there was good demand for this bond in Switzerland."

Poland is also benefitting from sanctions on now-junk-rated Russia, which has put the kibosh on many central and eastern European issuers, he noted.

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"The number of eastern Europe issuers with an investment-grade rating is shrinking. That makes Poland more attractive," Allenspach said.

There's another ace-in-the-hole keeping Poland in the negative-yield party: its economy is looking pretty.

"Poland is more like a developed market than an emerging market," Marcus Svedberg, chief economist at East Capital, said via email. "The economy is well managed and is growing steadily, there is limited political risk even during an election year, and monetary policy is well anchored with real rates being comfortably positive."

The country's credit rating is also likely to be upgraded, analysts say, with Societe Generale expecting that will happen in the second-quarter of next year, adding the change may be "overdue." The French bank said Poland's bonds offer "a compelling case for renewed yield compression," partially due to the European Central Bank's (ECB) quantitative easing program shrinking the availability of investable sovereign bonds.

Analysts are also shrugging off one potential risk of Poland's franc-denominated bond: the currency.

The country likely quickly swapped the proceeds back into zloty, Julius Baer's Allenspach noted.

Even if it didn't, East Capital's Svedberg believes the exposure is limited as a share of Poland's total debt portfolio, with the country's Treasury currently stipulating issuing 30 percent of its debt in a foreign currency, with 70 percent of that in euros.

"The zloty tends to move in line with the euro, and the depreciation risks to the U.S. dollar and the Swiss franc are arguably limited after the recent surge in those two currencies," Svedberg said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1