Yields on a spectrum of money market instruments, ranging from 91-day to 364-day Treasury bills (T-bills), seem to be approaching a potential peak against the backdrop of diminishing inflation rates, a stable monetary policy, and the implementation of new pricing directives by the Treasury.
Recent market data indicates a significant shift as yields on Treasury bills experienced a decline during the November 10, 2023 auctions, marking a departure from a consistent ascent over 33 weeks. Both the 91-day and 182-day bills witnessed a reduction in yields, although they maintained elevated levels at 29.84 percent (-13bps w/w) and 31.88 percent (-27bps w/w) respectively. Similarly, the 364-day bill saw a 25bps w/w reduction to 33.45 percent, representing its first weekly downturn since June 23.
In response to escalating yields in short-term papers, the issuer introduced price guidance during recent auctions, starting from November 3, 2023. This initiative, embraced for T-bill auctions by the government and Bond Market Specialists (BMSs), aims to align expectations between the Treasury and investors, potentially providing a mechanism to control yield fluctuations as investors bid within the guided rates.
Against the broader economic climate, headline inflation has steadily decreased for the third consecutive month, reaching 35.2 percent in October 2023, down from 38.1 percent in September 2023. This signals a continued disinflationary trend, diverging from the persistent 40 percent range observed in the previous six months, culminating at 40.1 percent in August 2023. Since its peak of 54.1 percent in December 2022, headline inflation has seen a cumulative decline of 18.9 percent.
The monetary policy rate has remained at 30 percent since the July 2023 MPC meetings and is expected to persist through the remainder of the year, aligning with easing inflationary trends.
The November 10, 2023 auction sustained its sixth consecutive oversubscription at 29 percent, attracting bids totaling GH¢4.01 billion against the week’s target of GH¢3.11 billion. The Treasury accepted and sold GH¢3.90 billion, reflecting a bid-cover ratio of 1.03x and adequate funds to settle maturing bills, exceeding 54 percent, marking the highest since March 2023.
Previous measures by the government to curb escalating Treasury yields proved effective in trimming bids towards the end of Q1-2023, capitalizing on robust demand for bills and subsequently lowering the cost of borrowing. However, continued reliance on money market borrowing post-April, coupled with limited external funding, sustained the upward movement in yields as investors sought appropriate compensation against prevailing macroeconomic and fiscal uncertainties.
Projections for this week’s auction anticipate a dip in T-bill rates, attributed to the newly implemented pricing methodology and decline in headline inflation. Moreover, robust participation is expected due to excess liquidity in the banking system and a scarcity of alternative investment options.
Anticipated T-bill maturities in the final quarter indicate a weekly average of approximately GH¢2.56 billion, signaling heightened financing requirements for the government to refinance these maturities. Despite this, an anticipated easing in headline inflation during Q4-2023 could mitigate the rise in yields.
Additionally, securing sufficient financing from entities like the IMF and other donors, a 36-month arrangement under the US$3 billion Extended Credit Facility (ECF) – a program based on the government’s Post COVID-19 Programme for Economic Growth (PC-PEG) – could alleviate the government’s refinancing burden on the T-bills market.
In an outlook shared by Databank, expectations lean toward a slower increase in money market yields and a robust bond market in Q4-2023. The market observer foresees a mirrored slowdown in the uptick of Treasury bill yields, aligning with the government’s reliance on money market funds and diminishing inflationary pressures. Despite this reliance, efforts to diversify funding sources are expected to intensify.
The estimated Treasury bill maturities of GH¢34.02 billion across the 91-day to 364-day bills represent a 9.72 percent increase from the previous quarter, exerting significant pressure on the government’s refinancing needs. The likelihood of the Treasury bolstering its reserves in Q4-2023 against impending domestic debt servicing obligations in Q1-2024 could increase reliance on short-term securities. Nevertheless, softening inflationary pressures are anticipated to decelerate the rise in T-bill yields.
Secondary Market
While competitive T-bill yields pose a short-term risk to the enhancement of bond market activity, forecasts indicate the continuation of strong trading driven by a gradual resurgence in demand from foreign investors.
The analysis of GFIM data for Q3-2023 reveals a significant turnaround in net-selling activity, fueled by substantial buying interest from foreign investors.
With the concurrent improvement in macroeconomic indicators, Databank anticipates that this increase in foreign investor demand will positively impact government bond yields, maintaining a robust trading environment.