Says yields will rise with increased government borrowing
Expects banks to trade in some of their holdings of BoBCs in exchange for Treasury Bills
A respected economist has discovered that government treasury bill yields (T-Bills) weakened due to the cap on total issuance at P4 billion, resulting in constrained supply.
Keith Jefferis, who is the Managing Director (MD) at Econsult, an economic think tank explained that banks were bidding lower yields “just to try and get the few t-bills on offer”.
T-bills stop-out yields fell below 3% across the board in the past months, tightening the gap with BoBCs. BoBCs offer yield anchored by the Monetary Policy Rate (MoPR) currently at 2.4%.
Data from the BoB shows that the 7-day nominal BoBC yield decreased from an average of 2.65 percent in the first quarter of 2023 to an average of 2.40% in the first quarter of 2024, due to the 25-basis policy rate cut by the Monetary Policy Committee (MPC) in December 2023. The stop-out yield on the 1-month BoBC, which was introduced in June 2022 to address some of the structural liquidity positions and support the construction of the short-end of the yield curve, averaged 2.60% in the first quarter of 2024, a decrease from an average of 2.94% in the corresponding period in 2023.
Treasury auction results dated 27 March 2024 show that stop-out yields for T-Bills stood at 2.5% for the 3-month tenor, 2.7% for the 6-month maturity, and 2.9% for the 12-month duration.
Banks seemed to prefer BoBCs which are shorter-term. But Jefferis believes the supply dynamics meant that banks had no choice but to buy them because t-bills were not available.
But Jefferis expects that the banks will trade in some of their BoBCs in exchange for Treasury Bills, which pay a slightly higher interest rate. Jefferis expects yields will pick up with government borrowing being ramped up.
“But if bank lending increases a lot then liquidity will fall and there would be less demand for BoBCs/t-bills.”
Banking treasurers cautioned that there aren’t avenues in which excess liquidity can be deployed accounting for the repatriation of pension fund assets and government spending. Data from the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) indicates that as at December 2023, a total of P8.84 billion has been repatriated back into the country with inflow of P0.5 billion anticipated for the year 2024. Absa Bank Botswana anticipates that government spending will drive liquidity.
The hope is with increased borrowing to P55 billion, the market will also see new curve points coming in (for example 3-year bonds, more t-bills on offer and an increase in quantum). The government had fully utilised its P30 billion quota. The cap on T-bills that Jefferis referred to was not officially announced but the rationale could be that it was more of a ceiling reached in the overall programme than the cap of T-bills.
“With the new borrowing limit (raised from P30 billion to P55 billion) the supply of t-bills will increase,” Jefferis said adding that banks will prefer them to BoBCs even if the difference in yield is small. The other thing that makes t-bills more attractive is that it will have an element of yield preservation. From a preference perspective, any longer dated investment alternative with better yield and that qualifies as a liquid asset, banks will have appetite for.
This is heightened more so that interest rates view is on the declining cycle being more probable hence banks would want to lock in a better rate. Stanbic Bank Botswana foresees a potential policy rate cut by the BoB in August. Onalethata Letlole, the Global Markets Corporate Dealer disclosed the bank’s expectation of a 0.25% reduction in the policy rate recently during a Structured Solutions Seminar.
But with the latest inflation projection (March 2024) showing that inflation is expected to remain within target, BoB Monetary Policy Statement shows that the policy rate is likely to remain unchanged.
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