Grappling with a double whammy of selective default ratings and narrowing compensation premiums above a rising inflation rate, the central bank in Africa’s red metal producer Zambia, were only able to sell K683million worth of 2-15yr paper of the K1.5billion of assets on offer it the November government bond sale. Friday 27 November saw decent interest in the 3 and 5yr tenors that absorbed K403million of the demand while the other tenors saw anemic interest.
Zambia was recently downgraded to selective default by Standards and Poor’s while Moody’s kept its rating at ‘Ca’ following fiscal fragilities. However post default, the copper producer is faced with asset sell-off pressure as offshore seek to divest investments which is exerting pressure on the exchange rate.
Read also: S&P lowers Zambia’s rating to Selective Default
Govies attractiveness fading as inflation spirals. Zambian fixed income paper has become unattractive given the balance sheet vulnerabilities and investors prefer shorter dated higher yielding securities for duration purposes. More recently, inflation has been on an upward spiral, climbing 140bps to 17.4% the highest in 4years.
Read also: Zambia’s November inflation jumps 140bps to 4yr peak, sinking 3m and 6m T-bills underwater
Under- subscriptions could potentially weigh fiscal funding which are evidently reliant on domestic money markets as chances of accessing external funding thin out post default.
Could inflation be signaling higher bond yields? Risk skew remains towards shorter dated yet higher yielding assets (treasury bills) while a few risk averse players are showing appetite for 3 and 5 year risk in the fixed income space. However the market expect compensation for longer dated tenors in an inflation spiraling environment. until this happens, the longer end of the bond curve will have very dismal interest.
Yields on Kwacha bonds remain fairly elevated in the 30’s keeping term funding costs fairly high while the short end has significantly ebbed due to cash flush liquidity conditions.
The Kwacha Arbitrageur