Appetite for Kwacha bonds got an adrenaline boost as demand for fixed income paper was trigged by a central bank asset buy-back program in Africa’s red metal hot spot. Defying a persistent risk skew that has weighed Zambia for over one and half years, the third bod sale of the year has so far been the best as the Bank of Zambia (BOZ) tracked appetite of close to 3 yards of which K1.47billion ($66.2million) was satisfied of the K1.5billion worth of assets on offer.
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The central bank is currently running a domestic debt restructure program through bond – buy backs (swapping shorter dated bonds for longer duration securities). This has increased secondary trading for Kwacha bonds pushing prices higher (higher prices entail lower yields) as evidenced by the plummeting yields in the secondary market which are forecast to compress the primary market curve to earn traders margin.
However currency weakness remains counter intuitive to this positive trajectory as cost push pressures persist in the market keeping inflation elevated. Zambia’s February print of 22.2% has kept the treasury bills curve, save the 1-year assets, underwater and could signal the need for the Kwacha yield curve to correct through an aggressive hike.
However this rally in demand maybe temporal to the extent that the central bank restructure program continues. Country risk profile remains feeble as the copper producers grapples with debt service characterized by a series of coupon defaults on its dollar bonds impacting sentiment.
ARREARS DISMANTLING, SHIFTING A FISCAL PROBLEM TO THE MONETARY SIDE
The domestic debt restructure exercise through paying off outstanding arrears with bonds is curing the fiscal backlog of obligations to suppliers and contractor but breeding greater pressure on the monetary side through higher dollar demand necessitated by Zambia net import position. With widening dollar scarcity, the money markets will remain bearish on account of inflationary pressure.
March Friday 19, bond sale outcome offers reprieve to the BOZ 1Q21 target of K13.2billion which still is in deficit from the fixed income sale under-subscriptions earlier.
The Kwacha Arbitrageur