The short term yield curve in Africa’s second largest copper hotspot Zambia, has extended its bearish streak from the December 2021 climbs that left markets ‘in wonder’ about vivid interest rate direction. This follows an earlier aggressive curve compression observed as part of a post election bond bump that saw a spike in demand for Kwacha assets on the back of a sentiment boost in the Southern African nation which coincided with a gold rush for emerging and frontier market yield in an inflation infested global environment. Ultra thin yields in the west made treasuries unattractive pointing post pandemic excess liquidity from stimulus programs to EMs.
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In a Bank of Zambia (BOZ) debut treasury bill sale of 2022 held on Thursday 14 January, the 6 month yield scaled 185 basis points higher to 11.5001%, the third rate hike in 6 weeks across heterogeneous tenors namely the 9 months and 1 year.
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The central bank in its 1Q22 prospectus on its website had revealed that auction sizes would increase 53% on a monthly basis to K6.6 billion through a T-bill K700 million increase on offer to K2 billion, every fortnight, as bond offerings widened a yard higher to K2.6 billion on a monthly basis.
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The Zambian authorities will seek to fund a K173 billion fiscal budget at a time it’s resource purse remains constrained in the labyrinth of ballooned debt for which it awaits the Washington based lender (IMF) board approval for a $1.4 billion 3 year Extended Credit Facility (ECF). The IMF loan is a precursor to successful debt restructure for which the copper producer targets to conclude by end of 1H22 and has resorted to finding its budget using the domestic money markets and through taxes. An increase in auction size is feared to scale the government security curve higher and could overcrowd the domestic credit markets that could deprive the private sector of the requisite liquidity to grow the economy.
With market liquidity north of 5 yards into Thursday’s auction, BOZ saw an appetite of K3.5 billion of which it absorbed K2 billion with the greatest interest observed in the 1 year yielding 15.0001%, the highest yielding tenor.
The Kwacha Arbitrageur