Yields rose at the Bank of Botswana’s (BoB) latest auction of government treasury bills and bonds, but the debt drive continued to underperform with just 37% of the bond amounts sought for being allotted.
Government is depending on the debt programme to provide the bulk of the projected P6 billion deficit for the current fiscal year. However, each of the monthly auctions conducted by the central bank to raise debt since the ceiling was raised to P30 billion last September, have underperformed with the government unable to secure the amounts it was seeking in the market.
At each auction, the primary dealers, who are exclusively banks, compete by offering the yields or returns they would desire on the funds they are willing to lend to the government.
Investors in the bonds are mainly pension and insurance funds who need the longer-term paper to mainly match their liabilities or investment horizons. With inflation expected to peak at 8.5 percent this year and the government, having recently suffered a credit rating downgrade, investors are pricing more risk into the debt they are willing to give to the government, leading to the pressure for higher yields on bonds.
The BoB, which conducts the auctions as government’s banker, has been in discussion with the finance ministry, urging it to accommodate the higher yields bidders are asking for. At the May 2 auction, yields were noticeably higher although the bonds again went without full allotment. One bond, the two-year note previously known as BW013, received no allotment for the P100 million on offer, with the BoB rejecting all eight bids where yields demanded by bidders reached as high as 9.8 percent. The 10-year bond had demands for yields as high as 12.8% although the BoB only allotted at 8.25 percent, while the 22-year bond had demands for yields equally as high as 12.8% with the BoB holding out at 8.25 percent as well.
Analysts at Kgori Capital noted that the yield on the 10-year bond had risen by 175 basis points from the auction when the bond was last allotted, while the yield on the 22-year bond had risen by 145 basis points from when it was last allotted. The yield on the six-year bond was 80 basis points higher than its last allotted auction, indicating the upward pressure on returns on the market. Government raised a total of P816 million from the auction, with P630 million coming from the three and six-month treasury bills, which have proved the most desired by the capital market in recent months.
Caster Moseki, the BoB’s director of financial markets told journalists recently that the yields being demanded on the market were “not in line with what you would expect for a market with a credit standing like Botswana”.
“We also have competition from other domestic corporates and external issuers in places like South Africa. “We are trying to reach out to external investors and it must be noted that while P30 billion looks like a lot here, for the external investors it’s a minuscule amount and it may not be appetising for them.”
Kgori Capital managing director, Alphonse Ndzinge previously told BusinessWeek that generally in the market, there is a high degree of segmentation between investors and their buying interest along the maturity curve.
“The interest in longer maturity notes really comes down to aligning pricing expectations between the issuer and investors, which is partly a function of forward-looking risk/reward expectations of those instruments relative to other investment opportunities in the market,” he said.
Ndzinge added on the short-term side of the market, the commercial banks are normally the dominant investors given their needs for asset-liability management for a combination of regulatory and liquidity requirements.
“And then on the long-end, investors with longer-dated liabilities such as insurers with products like retirement annuities tend to participate more,” he added.