Government bonds yield curve has been shifting upwards
Shorter-term BoBCs are yielding higher
While Absa Bank Botswana’s investment portfolio has remained fairly flat with growth of a mere 1% during the first half of 2023, Salma Baduel, the bank’s Country Treasurer said income corresponding to this portfolio has seen a significant increase in the past 2 years due to a change in portfolio mix.
Baduel was responding to a question during a Q & A session at the group’s results presentation for the half year ended 30 June 2023. The question from Pelotelele Motshidisi, the Investment Analyst at Kgori Capital sought to appreciate how the composition mix of the bank’s investment securities evolved, why it changed and the yield growth. In response, Baduel said the portfolio has a larger proportion of government bonds and that since the introduction of the 7-day Bank of Botswana Certificates (BoBCs) “we are able to realise more income from BoBCs compared to the prior year”.
BoBCs are instruments used to absorb liquidity in the banking system and are not intended for general investment purposes, according to the Bank of Botswana (BoB). Since March 2006, only commercial banks are allowed to hold BoBCs. Banks park funds at the central bank for 7 days, earning yields (currently 2.65%) at the prevailing Monetary policy rate (MoPR). Rising inflation has led to a tight monetary policy stance leading to the Central Bank increasing the MoPR by a cumulative 151 basis points in 2022.
Figure 1 Results of the Auction maturing on October 11 2023. Source: BoB
Over the past couple of years, Baduel said Absa has seen the rate on its investment portfolio increase by about 200% due to changes in portfolio mix and rising interest rates. “We have taken the opportunity of looking at the mix of our portfolio and looking at government bonds that have been giving us yield uptick,” Baduel said adding that the MoPR increase in the 7-day BoBC rate has also uplifted investment portfolios across the board from a yield perspective.
The government bonds yield curve has been shifting upwards dramatically currently at 8.6%, with demand primarily driven by pricing. Given the recent high levels of inflation in Botswana and the persistence of global inflation, investors required higher yields to be offered by the government in order to earn a positive real return from the assets, market players said. This was indicated by the 10-year bond (BW011) which saw an uptick in yield in 2021. With record high inflation and low yields on bonds, returns were negative.
Inflation remained above the Central Bank’s medium-term objective range and averaged 12.2% in 2022 significantly higher than the 6.7% average in 2021. Rising food and fuel prices lifted inflation to a 14-year high of 14.6% year on year in August 2022 and well outside the BoB 3-6% target range, leading to a tight monetary policy stance. While prices have moderated somewhat in recent months, Absa noted that they remain high by historical standards. “We therefore project headline inflation in Botswana to ease over 2023 to 6.2%,” Absa said. However, the consensus is that the central bank is still waiting to see where inflation will be by the end of the year before considering a change in MoPR.
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