Gov’t trims debt target to P500m for March
Mbongeni Mguni | Monday March 28, 2022 06:00
According to a notice published this week, the BoB is due to offer three bonds ranging in maturity from five to 18 years, although technically, the central bank could add shorter-term treasury bills to the line-up of Friday’s auction or increase the allocations it makes on the three bonds.
The BoB, as government’s banker, conducts monthly auctions of short, medium and long term government treasury bills and bonds to primary dealers who are exclusively banks.
At the auctions, the dealers compete to lend to the government by offering the yields they are seeking, with the BoB deciding the 'stop-out' yield or the level of interest it is willing to pay the dealers on particular securities on offer.
The amounts being sought at this week’s auction are a significant drop from the average of P1.7 billion the BoB has floated in the six preceding auctions.
Government is largely banking on its P30 billion domestic borrowing programme to fund the budget deficits it is facing, but the returns or yields it has been offering investors have meant lower than targetted funds have been raised at all the monthly auctions dating back to last year.
In all the auctions, the bulk of the funds raised have been from the shorter end of the maturities, which are treasury bills, with the bonds producing far lower allocations due to demands for returns falling beyond what the central bank is willing to accommodate.
Last year, research analysts at Kgori Capital said they expect the uptrend in the yields on government bonds to ease in upcoming auctions, as a balance is reached between the market’s demand for higher returns and government’s desire to keep its borrowing costs down.
BoB data indicates that while yields have stabilised in the latest auctions, they remain at elevated heights when compared to the levels seen early last year. The 2031 bond which sits in the middle of the various bond maturities in the local market, has seen yields rise from 6.02 percent to 8.33 percent in the last 12 months.
The central bank’s figures also show that the yield on the 25-year bond has risen over the same period from 6.43 percent to 8.45 percent.
Analysts have said besides increasing government’s borrowing costs, the higher yields could raise funding costs for other entities that seek funding in the local capital market.
The yields on government bonds form the benchmark against which yields for other issuers are based.
“The government must resist the temptation to issue bonds to finance expenditures,” analysts at Ninety One said in a recent budget analysis. “This is particularly worrisome in the current context where government bond yields are at levels that are close to ‘crowding out’ other market participants.”
Capital market participants have previously said their demands for higher yields are pricing in the country’s sovereign credit downgrade by Moody’s last April, as well as the trending higher inflation and the existence of better competing returns in the South African market.