The central bank in Africa’s copper producer sold K2-billion worth of government bonds in an oversubscribed sale supported by a sentiment boom as Zambia’s recovery prospects brighten. Of the K1.5-billion of assets on offer, the Bank of Zambia saw exceptional appetite of K9.4-billion in bids of which 2 yards were absorbed. Investor interest was concentrated in the 5 and 10 – year tenors yielding 32.99% and 31.0% respectively.
INFLATION JUMP AND ‘CURVE SAG’ NARROWED PREMIUMS ON BONDS
Friday, May 28 outcome saw a shift in risk skew from shorter dated higher yielding assets, a duration risk management theme to interest in longer dated Kwacha assets a pattern not seen in over a year. Inflation nonetheless snapped 150 basis points bearish to 23.2% sinking the treasury bills further under water save the 1-year while simultaneously narrowing the compensation premiums for the bonds whose curve sagged 179 bps on average across the demand curve.
PRICE DISCOVERY – PRIMARY AND SECONDARY MARKET YIELD GAP NARROWS
The Kwacha bond curve ebbed between 151 – 350 bps narrowing the gap between the primary and secondary market levels. This was occasioned by rising demand for Kwacha fixed income seen in the secondary market pushing prices higher (higher prices entail lower yields as there exists an inverse proportional relationship between yields and asset prices of discount instruments). The most sought for tenors saw yields ebb 151 and 350bps allowing for asset valuation correction from previous levels.
COPPER PRICE BULLS, STABLER KWACHA AND AND IMF DEAL ARE FUELLING SENTIMENT
Zambia’s improved sentiment reflecting in the bond market takes a cue from stronger copper bulls and fiscal steps bringing closer, a bailout deal with the Washington based lender, the International Monetary Fund – IMF. The red metal producer is on the cusp of an Extended Credit Facility – ECF hopefully after the August polls. Despite a weakening currency trajectory, the local unit has seen recent stability and analysts continue to forecast a rally at the end of 2021 into 2022 supported by healthier metal prices.
The Southern African nation is in the middle of a debt restructure after being the first nation to default in COVID era. Sealing a balance of payment support deal remains a key precursor to successful debt restructure which creditors have highlighted.
The Kwacha Arbitrageur