Against the odds, the bond sale in Africa’s red metal hotspot Zambia was deeply undersubscribed with the Bank of Zambia raising only about K1.4 billion representing, just over half what the target auction size was. With eager anticipation of bailout from the International Monetary Fund, markets would expect soared interest in Kwacha assets which ideally was forecast. However the outcome of the August fixed income sale just confirms the state of global environment, currently risk off with most offshore players seeking safer haven in dollar denominated assets as confirmed by the DXY index against a basket of 6 major currencies, above a 105.
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World monetary policy tightening conditions continue to shape asset pricing with an inflation easing momentum in the US to 8.5% from highs of 9.4% while the Bank of England has intervened aggressively to curb the 10.1% 40 year high consumer price index. There is a greater anticipation that current asset pricing in the west will be at fair premiums as inflation eases while local and offshore players will seek clarity around Zambia’s sovereign prospects concerning its bailout status with the Washington based lender.
Ten (10) and fifteen (15) year yields scaled higher 200 and 172 basis points respectively to 27.75% as the rest of the tenors remained unchanged. The auction saw increased interest in the 3 -5 year tenor with a class of investors that took 15 year sovereign risk. Bids totaled K2.4 billion of which K1.5 billion worth of appetite was satisfied.
Kwacha paper remains attractive with fair premiums above single digit inflation for local investors while a stronger currency will keep government securities attractive to offshores. Global sentiment however remains risk – off shaped by inflation, sagging base metal markets, food and energy market dislocations fueling recessionary fears.
Despite the under subscription is still twice the previous auction outcome as demand continues to creep back into fixed income sales.
The Kwacha Arbitrageur
