Government raised just P986 million of the P2.1 billion it was hoping to secure at last Friday’s auction of bonds and treasury bills, returning to an underperformance that has dogged the domestic debt programme for months.
The Bank of Botswana (BoB), as government’s banker, conducts monthly auctions of treasury bills as well as 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.
However, since its approval by Parliament last September, the P30 billion domestic borrowing programme has underperformed, with the dealers demanding yields higher than the BoB and government have been willing to accept. The situation threatens government’s ability to fund the budget deficits it has forecast for the 2020-2021 and 2021-2022 fiscal years, which amount to about P20.6 billion.
The September auction of notes had triggered hopes of improving outcomes for government, with P500 million of the P850 million raised coming from bonds, one of the highest allocation ratios in recent months.
However, the October auction conducted last Friday, saw a return to the underperformance of bonds, with allocation ratios as low as 23%. Three bonds were available at the auction, with the P200 million offered under the six-year bond raising just P45 million and the P300 million offered under the ten-year bond raising P113 million. The P100 million offered under the 22-year bond, however, raised P78 million.
Auction results released by the BoB indicate that all three bids enjoyed strong interest and were oversubscribed in terms of the value of bids received compared to the amounts on offer. Market-watchers said yields at the auction moved 'minimally'.
“The marginal movement of yields coupled with the oversubscription indicates that the auction did not lack interest from the market, but rather that the central bank was unwilling to accept some of the bids made,” a market analyst told BusinessWeek this week.
Bond yields have been climbing since the beginning of the year, as the BoB and government have sought to accommodate the returns sought by bidders.
Capital market participants have said their desired yields are pricing in the country’s recent sovereign credit downgrade by Moody’s as well as higher inflation, where the rate recently hit 8.9 percent, a nine-year high.
The BoB, however, is keeping a wary eye on the yields and has expressed concern about the pricing of government securities in the market.
“I consider it unfortunate that in the recent past we have seen bid yields for medium to long-term government bonds that are exceptionally high and clearly out of line with the monetary policy posture and medium-term inflation prospects and also not reflecting the sovereign credit rating for Botswana,” BoB deputy governor, Kealeboga Masalila, told a recent meeting of the Botswana Bond Market Association. “Therefore, the market (is) failing to provide cost-effective funding of government.”
Masalila added: "Let us reflect on this as market participants and work together to address any challenges or frictions that drive such behaviour".