Risk skew towards short dated higher yielding assets in preference over longer dated fixed income government securities, has been a very consistent theme in the Zambian markets over the last two years. Amidst fiscal fragilities and pandemic induced economic woes, market players have shied away from locking liquidity in bonds for fear of duration risks.
The one year treasury bill has received the most attention for not only being priced attractively, yield-wise and above inflation but has had the most lucrative duration benefit in uncertain times. A 355 basis point premium above an inflation of 22.2% is the best return one can ever earn on the short end of the Kwacha curve, with the remaining tenors all underwater (below the consumer price index number).
The debut and sophomore bond sales of the year have been dismal, a reflection of unattractiveness of offerings and general risk aversion by investors. This however is taking a different twist the secondary market has repriced government securities whose yields range between 29.0%-33.0% from 34.0%-36.0% a fews ago. What has caused this shift? The central bank asset buy-back program.
The Bank of Zambia has actively been, like any other astute central bank globally in pandemic times, buying back bonds as part of a domestic debt restructure program. (Buying back shorter dated bonds and issuing longer dated tenors to spread obligations). This has overnight fueled demand for government securities causing yield compression but higher prices, an opportunity for mark to market trading gains. Prima facie, this should result in market correction in the primary market but for an inflation spiral which could potentially offset this yield rally.
The Bank of Zambia will seek to raise K1.5billion in Fridays March 19 debt sale which could see increased appetite in the first quarter offerings given the shift created by the bond buy – back program.
The Kwacha Arbitrageur
