Poland is paying the lowest yields relative to Hungary in almost six months as investors reward the European Union\'s largest eastern economy for financing most of its 2011 needs and pledging to reduce the deficit. The yield on Poland\'s ten-year bonds dropped 49 basis points, or 0.49 percentage point, to 5.78 per cent last quarter, the biggest decline since the first quarter of 2010. The rate for similar-maturity Hungarian securities rose 12 basis points to 7.31 per cent, according to data compiled by Bloomberg. The gap between the two reached 157 basis points on June 23. Raising debt costs Speculation that a worsening of Europe\'s credit crisis would raise debt costs spurred the Polish government to cover more than 75 per cent of 2011 borrowing needs in the first six months of the year, amassing more cash than needed to repay securities coming due this year. The Finance Ministry cancelled sales of Treasury bills in the third quarter and limited auctions of bonds to one per month from as many as two in the previous quarter, according to its statement on June 30. Article continues below \"Certainly in terms of the fiscal news, Poland has surprised the market on the positive side,\" said Ronald Schneider, who helps manage the equivalent of $1.2 billion (Dh4.4 billion) in east European and emerging-market bonds at Raiffeisen Kapitalanlage GmbH in Vienna. Hungary\'s local-currency bonds have slumped since May amid speculation that Prime Minister Viktor Orban may fall behind on plans to reduce the country\'s debt burden, the biggest among the EU\'s eastern members at 77 per cent of gross domestic product. Poland\'s bonds due in 10 years or more returned 7.2 per cent in euro terms in the second quarter, the second-best performance for the Europe and Africa region, behind Switzerland, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Poland\'s \"credibility is to improve from here,\" Aurelija Augulyte, an emerging-market analyst at Nordea Bank AB in Copenhagen, wrote in a report on June 23. The Nordic region\'s largest bank recommended clients buy Polish bonds maturing in October 2015 and sell the German equivalent. Foreign holdings International investors raised their holdings of zloty-denominated bonds by 22.9 billion zloty ($8.4 billion) to a record 147.6 billion zloty in the five months through the end of May, according to the Finance Ministry\'s website. Foreigners are the biggest holders of Polish debt, ahead of local pension funds and banks. Franklin Templeton Investments, which manages more than $733 billion of assets, favours investments in Poland and Sweden as a refuge from the Eurozegion\'s debt crisis, predicting more \"downside\" risks for Greece and Portugal, according to John Beck, the fund\'s London-based co-director of global fixed income.