Zambia’s bond rally euphoria seems to have halved judging from the bids observed in Friday September 17 fixed income sale compared to the August 27 debt sale. With appetite of K6.4billion compared to K12.5 billion in the post election bond sale, yields have extended the compression by an average of 218 basis points across the fixed income spectrum as offshores and locals lock-in in yields before the steam phases out. Of these bids the central bank absorbed K1.5 billion concentrated in the 5 and 10 year tenors.
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TERM FUNDING TO EBB COST OF CREDIT
Five (5) year paper sagged 300bps to 22.0% while the 10 year yield is now priced 100bps lower at 26.0%. The Kwacha yield curve has cumulatively compressed an average of 825bps from the last bond auction post the August polls. With subsiding political risks following the successful election of Hakainde Hichilema as the copper producers 7th Republican President, positive sentiment and risk appetite continues to claw back into the Southern African nation with a very strong pulse in the fixed income space as offshore players hunt for yield. The last two bond auction outcomes continue to send strong signals around compression in interest rates good for credit markets (for consumers) yet adverse for financial institutions (in margin squeeze).
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Clad with default rating status amidst a debt restructure in the labyrinth of post pandemic effects, the copper producer seeks an extended credit facility with the Washington based lender for balance of payment support. Credit spreads on Zambias dollar bonds have narrowed following valuation appreciation in Eurobond prices, a sign of positive sentiment, a confidence the outside world is exhibiting in Hichilema’s leadership.
WHY KWACHA BOND RALLY STEAM IS PHASING OUT QUICK
The state of the global economy given elevated inflation and ultra thin treasury yields has made investment in the west unattractive but rather channeled pools of excess global liquidity to emerging and frontier markets, Zambia inclusive. However, much as Kwacha yields are climbing down quick, the US Federal Reserve is slowing down on its tapering program as it reigns in on inflation given a fast growing US economy. This is likely to bring risk appetite back to the US which could phase the bond rally steam observed in emerging markets.
Currency risks remain muted following an aggressive winning streak which has started to ease given uptick in business activity.
The Kwacha Arbitrageur
