Given the morphing global fundamentals giving rise to an increase in short term risks, Africa’s second largest copper hot spot has not been spared from the autopsy effects. Offshore interest in Monday March 22 government bond sale ebbed as the Bank of Zambia only raised K1.84 billion of the K2.6 billion of assets on offer despite an appetite in bids of K2.8 billion. Demand skew was distributed fairly between the 2 to 7 year tenors with the strongest in a longer dated bucket, the 7 year.
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This will be Zambia’s third sale and the first undersubscription of the year 2022 setting the central bank a few millions of Kwacha behind the expected debt sale proceeds for fiscal financing purposes. According to the BOZ securities prospectus, appetite for government security offerings for 1Q22 increased by 53.0% on a monthly basis signaling a growth in fiscal funding needs especially at time when the Southern Africa’s external credit lines are thin given it’s sovereign risk posture.
Yields in the Monday fixed income auction remained unchanged save an infinitesimal sag in the 2 year tenor by 4 basis points to 17.999%. However traders continue to see 125 – 175 bps higher 2 to 5 year yields in the secondary market suggesting a fair value of where the government curve must be.
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New money is eluding Kwacha securities as the US Federal Reserve Bank extends its rate hike cycle. Old or existing money already locked up in securities running risks being repatriated at maturity as offshore seek more attractive real yields in the West. This will cause flight to safety asset sell-off pressure resulting in currency pressures.
Higher yields will make US treasuries far more attractive at a time uncertainty in a chaotic world is breeding greater safe haven appetite for dollar denominated assets and gold as inflation hedges. This will fade earlier support for the copper currency experienced post August when offshore flows sought a home in emerging and frontier market assets.
It is likely that the crowding out of the indigenous money markets will tend to lift the curve higher causing a rate increase spiral effect in the medium term. This remains the biggest risk to term funding costs.
On the horizon is a treasury bill sale earmarked for Thursday March 24.
The Kwacha Arbitrageur