BoB expects lower bond yields as PFR 2 inflows strengthen

Mbongeni Mguni | Monday December 18, 2023 06:00

Under changes to the Retirement Funds Act, local pension funds have until December 2027 to invest a minimum of 50% of their assets domestically, a figure that as at August translated to P16.3 billion being repatriated from offshore. Known formally as the Pension Fund Rule 2 or PFR 2, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) statute previously required pension funds to invest at least 30% of their assets locally.

BoB’s financial markets department director, Lesego Moseki, told BusinessWeek that the repatriation of pension funds would lead to increased liquidity in the local market, helping ease the yields paid out by the central bank on its capital market activities.

The BoB administers government’s P30 billion domestic debt programme and auctions a mix of treasury bills and bonds monthly.

“We have seen a decline in the stop-out yields over the past five or so auctions,” Moseki told BusinessWeek during a BoB briefing last week. “As funds continue to flow from the PFR 2, we expect most of the returning funds to flow into the bond market and therefore yields will continue to trend lower. “We also expect inflation to be generally contained within the target and if it’s contained and market expectations are also in line, there should be no upward pressure on yields.”

He added: “These yields are largely to compensate for inflation and if inflation is lower, then yields should be lower.”

The central bank and by extension, government, went through a testing period of escalating yields beginning in September 2020 when Parliament doubled the domestic debt programme to P30 billion. A combination of a sovereign credit ratings downgrade, escalating inflation which reached a 14-year peak last year and local bidders’ preference for the South African market, drove yields higher.

Higher yields for the debt programme are associated with rising debt costs for government, with the Finance Ministry in February allocating an extra P6.7 billion in debt payment obligations for the 2023–2024 financial year.

However, the yields at the BoB auctions appear to have peaked and plateaued earlier this year, while the homeward drift of pension fund assets has meant the central bank’s debt auctions in the second half of the year have increasingly been over-subscribed, with the attendant sliding yields.

BoB data shows that government’s longest maturing bond, the 2043 paper, began the year with a yield of 8.86 percent, but by last week was pegged at 8.62 percent.

Moseki told BusinessWeek that other factors would determine the direction of yields going forward.

“We expect more funds to come in from the pension funds but we are also expecting that government at the beginning of the next year, will come with a borrowing plan for the 2024–2025 financial year. “That will bring some additional bonds into the market,” he said.

While government’s intention in revising the PFR 2 is to increase the pool of local capital available for domestic investment such as in infrastructure, analysts say the local market’s lack of depth means, at least for a while, a large part of the returning funds will wind up in the government bond programme and other cash holdings such as bank deposits.

Analysts this week also said while the higher liquidity due in the market would help government’s debt programme, it would raise the BoB’s interest expenses as the central bank would have to increase its Bank of Botswana Certificate allocations to mop up the extra excess liquidity.

NBFIRA has given pension funds and their asset managers the annual phased-up targets of the percentages they should reach as they climb to 50%. For December 2023, pension funds should have reached a threshold of 38% and according to BoB data, the industry was at 37.6% at the last count.