Undersubscription and underwater ‘real’ yields is the best description for Thursday December 31, treasury bill sale. With aggregate interbank liquidity north of K3.5bln, the central bank in Africa’s red metal producer Zambia sold K760.4mln ($36.0mln) worth of bills in the last treasury bill auction of the year. This coincided with Zambia Statistics Agency (ZSA) release of December inflation headlines which accelerated 180 points north to 19.2% as food prices sprinted. The twenty seventh debt sale, saw an appetite of K905.2mln (face value) of which 74.0% was in the 1year.
Bids satisfied (allocation) versus the initial asset amount on offer of K1.3bln translated to a 56.9% subscription rate, the last undersubscription of the year while bid-cover ratio was 1.2.
The debt sale saw interest in two buckets namely the 1year and 3month tenors that sold K531.8mln and K224.1mln respectively with the other tenors recording infinitesimal demand. Yields across the curve stood pat save the 1year that edged higher 122.7 basis points to 25.75% making it the most attractive point on the term structure of Kwacha interest rates. The last 6months have seen treasury bills yields climb down significantly on the back of excess Kwacha liquidity but the last auction of the year could potentially signal the genesis of an uptick in interest rates.
Treasury bills nonetheless finished the COVID year as winners in risk-skew surpassing bonds that remained sub-optimal in performance given duration risks in light of Zambia’s deteriorating fiscal posture. Zambia’s credit ratings were lowered to selective default by Standards and Poor’s and default by Moody’s late last year on account of fiscal fragilities that saw the copper producer skip a $42.5mln coupon payment on its 2024 dollar bond. This theme is forecast to persist into this year given uncertainty in the fiscal environment in the labyrinth of elevated debt. Zambia is in the middle of debt restructure negotiations with Eurobond and Chinese creditors.
The Southern African nations December inflation readings announced by Zamstats on New Year’s Eve sent its yield curve 180bps underwater as headline print raced to 19.2% on the back of a rally in food prices and lagged effects of a currency slide. Except for the 9months and 1year yields, real returns on the 3month and the 6months bills are wider in the negatives at 14.0% and 16.0% respectively.
A higher inflation rate does narrow premiums for taking sovereign risk currently making some tenors unattractive to invest in. The recent upward trajectory in inflation remains a signal for potentially bearish interest rate risks for Zambia both at yield curve and overall monetary policy level.
The Kwacha Arbitrageur.