Treasury Yields Soften
Spreads with BoBCs Tighten
BoBCs remain popular
Bond issuance programme likely to push up rates – Economist
Botswana’s Treasury market is experiencing a downward trend in yields, attributed to a surge in repatriated pension funds seeking investment opportunities domestically.
This influx, coupled with anchored inflation expectations, has tightened the spread between Bank of Botswana Certificates (BoBCs) and Treasury-Bills (T-Bills). BoBCs, with yields tied to the Monetary Policy Rate (MoPR), seem to be popular among investors with the central bank raising more than P10 billion on the market.
Declining inflation (down to 2.9%) has enabled the Bank of Botswana (BoB) to maintain the monetary policy rate (MoPR) at 2.4%.
Observers argue that if the central bank cuts the rate, T-bills might be more attractive for banks’ liquidity management. If the yields between T-bills and BoBCs are too close, banks will prefer placing funds in the more liquid BoBCs since they mature weekly.
BoBCs currently offer yields of 2.4% for a week tenor and 2.5% for 1-month durations.
The stop-out yields for 3-month, 6-month, and 12-month T-Bills have exhibited a notable decline from their previous levels, having previously trended above 3%. Treasury auction results dated 27 March 2024 show the highest bids above 3% across all three. Stop-out yields stood at 2.5% for the 3-month tenor, 2.7% for the 6-month maturity, and 2.9% for the 12-month duration.
The contraction in stop-out yields between the 1-month BoBC and the 3-month T-Bill is noteworthy with both instruments recording similar returns on average.
The most recent Bank of Botswana Certificates (BoBC) auction results for 29th April reveal a substantial allotment by the government. Notably, P11.6 billion was fully allocated for 8-day BoBCs. Additionally, P1.5 billion was allotted for 1-month BoBCs.
For the BoBCs maturing on 30th April, the BoB allotted a substantial amount of P13 billion, marking a notable increase of P3 billion from the preceding auction. This significant uptick in allotment suggests a heightened demand for BoBCs among banks, likely driven by several factors, including the downward trend in T-Bill yields.
Government treasury bond results for the auction held on 27th March 2024 indicate that BoB raised a total of P620 million through T-Bills. Of this amount, P320 million was fetched through the issuance of 12-month T-Bills.
Additionally, P300 million was raised through the issuance of 3-month and 6-month T-Bills each.
Given that BoBCs are anchored by the Monetary Policy Rate (MoPR) which the central bank has control over, the bank was asked whether it would contemplate reducing the rate to increase the spread and enhance the attractiveness of T-Bills. Lesego Moseki, Director of the Financial Market Department, expressed skepticism regarding the effectiveness of such a measure.
His view is that for as long as there is a lot of money coming into the market and there are no other available instruments or investment opportunities for those funds, they are going to chase available assets. Therefore this will depress yields. Minister of Finance Peggy Serame recently disclosed that a substantial P8 billion has entered the country in line with the repatriation of pension funds assets to meet the 50% threshold for local investment.
“There has been money coming into the market. Those funds as they get invested and you get higher demand for bonds, the stop-out yield will be lower,” Moseki said.
Economist Keith Jefferis argued that a key test will be whether this trend can be maintained (or alternatively, reversed) once the Government significantly increases the pace of domestic borrowing and T-bill/bond issuance, as indicated in the Government Borrowing Strategy for 2024/25. The long-term government bond rate (BW012) declined to 8.29% in February 2024, down from 8.72% in November 2023.
The government increased the borrowing threshold to P55 billion with about P20 billion expected to be raised this financial year. “The increase in government bond issuance programme for 2024/25 is likely to push up rates,” Jefferis wrote in his Q1 2024 report.
Moseki has also explained that yields have also been going down because inflation expectations are anchored at lower levels. March Business Expectation Survey indicates that businesses expect inflation to remain within the 3 – 6% objective range in 2024 and 2025.
Moseki said investors are not demanding so much compensation for their investments because they will not be eroded by inflation.
Headline inflation decreased from 3.9% in February to 2.9% in March 2024, breaching the lower bound of the medium-term objective range of 3 – 6%. The decrease in inflation was mainly due to the diminishing impact of the increase in domestic fuel prices in the corresponding period in 2023 (base effects). Inflation is forecast at 2.3% for April 2024 and the Monetray Policy Committee projects that inflation will remain below the lower bound of the objective range temporarily and revert to within the objective range from the third quarter of 2024 into the medium term, averaging 3.2% in 2024.
Comments