Market could push yields up high again

The decline in yields across the market’s short-term spectrum has halted, signlling a reversal of the cost-cutting move by the Treasury to keep yields on the low at around 15 percent for the 91-day T-bill. This is amid liquidity-tightening efforts by the Bank of Ghana (BoG).

At the BoG’s March 2023 Monetary Policy Committee (MPC) meeting, the policy rate was increased by 150 basis points (bps) to 29.5 percent, and the cash reserve requirement increased to 14 percent.

Treasury yields rose marginally last week to attract investors, as demand weakened in the previous week. This marked a second successive week the yields on T-bills rose – following nine consecutive weeks of robust auction performance of over-subscriptions which had yields on the decline.

During last week’s auction, which was settled on April 3, 2023, the 91-day bill increased by 50bps to 19.39 percent, while the 182-day bill surged by 42bps to 21.86 percent. In effect, compared to a target size of GH¢1.34billion, investors tendered an amount of GH¢1.62billion between the 91- and the 182-day bills, reflecting an oversubscription of 21 percent of the target size.  The Treasury accepted and allotted GH¢1.60billion to cover a sum maturing face value of GH¢1.28billion due this week, indicating a maturity cover of 1.25x.

Prior to the last auction that was settled on April 3, 2023, following the MPC’s decision, the market had signalled dissatisfaction with yields on the short-term bills. This resulted in a downturn in the demand for T-bills after nine consecutive weeks of over-subscription, as Treasury recorded under-subscription of GH¢2.44billion, 24 percent short of the GH¢3.21billion issuance target.

The higher offer target relative to the refinancing obligation for the week set the stage for a tilted nominal higher yield, distorting the yield compression strategy that started in March 2023.

The relatively lower demand during the auction on March 24, 2023 induced an increase in the 91- and 182-day yields. The 91-day yield was higher at 18.88 percent, up by 35 bps w/w. Likewise, the yield on the 182-day maturity saw a 17 bps w/w increase to 21.44 percent. The 364-day bill however declined by 116 bps since its last issue, to clear at a weighted average yield of 25.66 percent.

With GH¢1.68billion due across the 91-to-364-day bill next week, the Treasury intends to raise GH¢1.77billion to refinance its maturity value.

Apakan Securities, in its assessment of the market, observed that demand for Treasury bills lost its momentum in the past week on the back of unattractive yields. In effect, there is a further expectation that yields will continue their upward trajectory in the coming week.

“We expect yields to continue their upward trajectory this week, albeit at a moderate pace to attract investors as Treasury bills remain one of the key avenues for the government in financing its budget deficit,” it stated.

Secondary market

Secondary market activity last week was uninspiring, with total trading volumes tumbling to GH¢62.31million from GH¢299.58million the previous week.

Apakan Securities mentioned that the market was less active due to the unexpected policy rate hike.

“We think market participants were less active last week due to the unexpected policy rate hike of 150bps to 29.50 percent. The central bank’s decision to slam the brakes on rate increases – although the local currency remains relatively stable and headline inflation dropped marginally in the first two months of 2023 – surprised the market,” Apakan Securities said.

The policy rate increase resulted in the BoG issuing its 14-day and 52-day bills at 29.50 percent and 30.25 percent respectively last week. As such, this attracted market attention to the auction last week – slashing trading volumes on the secondary bond market.

Last week, the old bonds accounted for 34.65 percent of the total GH¢62.31million volume. Trading activities hovered around the 10-year paper, and settled at 36.81 percent. The new bonds, Aug-2027 (CPN: 10.00 percent), were actively traded and cleared at 10.11 percent.

“We are bearish on the market this week, and we think activity on the market will remain lifeless as investors seek better investment alternatives. The holiday-shortened trading week is also expected to weigh on trading volumes,” it added.