In this second instalment of Investing in a High Yield Environment, market dealers note that strained government finances have pushed investors toward short-term instruments now offering double-digit returns.
Senior Dealer at the Bank of Botswana, Mr Boago Kebaitse, told a Bifm breakfast seminar that the government no longer calls the shots on borrowing costs.
Instead, he said, “we are forced to accept the pricing that the market offers,” adding that “we have to sort of listen to the market in terms of pricing and also in terms of the preference.”
Fund managers have been pushing for better yields on T-bills (short-term) and bonds (longer-term) as they weigh where to place pensioners’ money for the best return. With banks paying around 15% on deposits, the government has struggled to raise the amounts it wanted from the market and is now being compelled to offer higher rates. T-bill yields have jumped sharply as a result.
As rates increased, dealers, who act as intermediaries between banks and the government, observed that most investors have been putting their money into short-term cash investments: T-bills and shorter-term bonds.
“We see investors actually invest more in the money market space because of the high rates as opposed to the bond market,”
First National Bank Botswana’s (FNB) Head of Funding and Liquidity, Ms Chendzimu King, observed.
Banks, as primary dealers, sit between the government and investors in this process.
Most of the action in the credit market is coming from big players: fund managers and insurance companies handling billions. Ms King explained that because their business is built on long-term promises, like paying pensions to retirees years down the line, they naturally prefer to put money into longer-term bonds. Those maturities line up with when they’ll need to pay out, so the risk feels more manageable.
Money Markets, Bonds Interplay
With short-term rates so attractive, institutions are piling money into money market instruments like T-bills that mature in 3, 6, or 12 months. Short-term instruments give quick returns, while bonds are long-term.
Ms King said that investors with millions ask themselves: if they can earn double-digit returns in money market funds, why tie up their money in long-term assets that pay much lower rates?
As a primary dealer, she’s also noticing how cautious investors have become. Because of the government’s fiscal pressures and uncertainty around future interest rates, investors are “selectively investing at the belly of the curve”, meaning medium-term bonds where the risk feels manageable.
Long-term bond Rates On The Rise Also
Ms King added that the government has also been raising rates on long-term bonds, trying to attract more buyers. The 10-year maturity rates are now averaging around 11%.
This is the investor communicating price discovery… saying I require a higher risk premium for the risk duration,”
Ms King explained.
Mr Kebaitse agreed: the market is pricing in the government’s fiscal troubles, and the government is having to accept that pricing. The government had recently embarked on a road show with investors. In the last two auctions (September and October), after the development, including increasing interest rates, the government was able to bring in more money through bonds and T-bills.
