Finance Minister Peggy Serame and BoB Governor Cornelius Dekop
Offer for T-bills now lower
The government has continued to increase the quantum of longer-term instruments, with offers for treasury bills (T-bills) now lower than those for longer-dated bonds.
A treasurer at Standard Chartered Bank (StanChart) attributed this move to the country's fiscal challenges, as diamond revenues have fallen short of targets.
At this week’s auction (25th September), the Bank of Botswana (BoB) aims to raise P2.7 billion on behalf of the government; P2 billion is being offered through longer-dated instruments compared to just P700 million for T-bills. The auction will offer P350 million each for the 3-month and 6-month T-bills. On the longer end, the government plans to auction P600 million in 5-year note, P600 million in 11-year bond, and P800 million in 19-year bond.
The increased quantum for bonds is a notable shift from previous auctions, where T-bills dominated. In the last auction for August, BoB sought to raise P3.8 billion, offering P2 billion in longer-dated bonds and P1.8 billion in treasury bills (T-bills). However, the bank raised only P1.8 billion through T-bills, compared to P430 million for bonds. An analysis of the August auction results shared by Kgori Capital, a local investment firm, revealed that 59% of the total P3.8 billion was allocated, with under-allocation noted at the longer end of the curve.
As the market entered the bond auction on August 23, 2024, investors anticipated either a significant under-allocation for longer-dated notes or a notable increase in rates. This expectation stemmed from concerns about BoB’s reluctance to offer higher rates for longer-dated instruments, coupled with market bids at elevated rates for those tenors.
For bonds, the government acts as a price taker due to inherent risks, according to experts. Tshegofatso Tlhong, Kgori Capital’s Chief Investment Officer previously explained that liquidity providers are now assuming entity risk; if a company or government raises a bond and the lender disagrees with the pricing, they can opt not to participate due to the associated risks.
If investors participate, she said rates may decrease; however, there will be a point where rates stabilise due to the inherent risk of the government or issuing entity, as compensation for that risk is necessary.
In other words, she said liquidity providers have the option to participate, and if negotiations occur—especially for corporate issuances—bond yields may increase based on the risk profile.
At the last auction, yields for the 3-year note, 7-year note, and 19-year bond increased by 125 basis points (bps), 25 bps, and 33 bps, respectively, according to calculations by Kgori Capital.
This indicates that there is a specific point at which the market is willing to provide liquidity.
“Then it’s up to the issuers to say do we then review price or do we leave liquidity on to the table,” Tlhong said.
The BoB Monetary Policy Committee (MPC) cut the Monetary Policy Rate (MoPR) by 25bps in June 2024, against general market expectations for rates to remain unchanged. This followed inflation having reverted to the Central Bank’s objective range, subsequently, the MPC cut MoPR further by 25bps in August 2024. When interest rates decrease, the MPC anticipates that it will become cheaper for the government and corporations to raise funds through issuing bonds or taking out loans. After the decision, Deputy Governor Dr. Tshokologo Kganetsano said yields should adjust in response to the rate cut.
Gale Sennanyana, Head of Treasury at StanChart, noted that when there is a rate cut or increase, the shorter end of the curve typically responds faster than the longer end. But Sennanyana observed that “the shorter end is responding slowly mainly because rates are slow”.
“On the longer end of the curve, we have been noticing increasing yields, or the rates have been going up rather than going down,” she said arguing that maybe that can be attributed to fiscal challenges.
Comments