As the world deals with a rising inflation postmortem from stimulus interventions and delayed tapering by global central banks, treasuries in developed countries remain unattractive as interest rates remain ultra thin. This has pointed global yield hunters to Emerging and Frontier Market (EFM) assets such as government bonds for nations like South Africa, Kenya, Uganda and Zambia. Africa’s red metal producer has in the last two auctions seen strong appetite for its paper with the most recent oversubscribed in the July 23 debt sale.
With bids amounting to K2.98 billion, the Bank of Zambia absorbed K1.64 billion of the market appetite concentrated in the 2 to 5 year tenor of the K1.5 billion of assets on offer. Yields were fairly unchanged save for the 3 and 5 year tenors which edged 100 basis points higher to 31.49% and 32.99% respectively.
The S&P Zambia sovereign bond index reveals positive real dollar yields for investing in government securities in comparison to US treasuries whose real returns are negative in light of record inflation. This has made EM assets very attractive resulting in increased flows which are supporting exchange rates.
Offshore interest in government securities has been a key driver of foreign exchange flows into the Southern African nation and has significantly provided supported to the Kwacha which has been on a winning streak for 7 days straight reversing a portion of its pandemic induced asset sell-off pressure (‘flight to safety’) related losses. The copper currency posted 2.9% gains on auction day closing at 20.3/20.7 (bid/offer) after opening at 21.8/22.2 levels.
It is very likely that the interest in EM assets will persist for as long as global central banks delay tapering and for as long as inflation remains elevated. Zambia is in talks with the Washington based lender, IMF for balance of payment support in the wake of an elevated debt position for which a package will be a precursor for successful restructure. Strides made thus far with the lender have helped with boosting sentiment especially post default on its dollar bond coupons while copper prices have continued to trade at all time highs.
The Kwacha Arbitrageur