Despite an underwater term structure of interest rates, the 1-year treasury bill remains the sweetest spot on the Kwacha term structure of interest rates. Amidst rising inflation a 20 points below 23.0%, one year bills are the only short term assets yielding a return above inflation at 25.75%.
With market liquidity of circa K3.8billion into last Thursday’s (April 8) debt sale, K800.3million of the one Kwacha yard of demand was housed in the 1-year bucket for the sole reason that the tenor is the most attractive. Risk skew remains towards shorter dated higher yielding assets as players manage duration risks in a jurisdiction clad with sovereign risks and uncertainty fueled by a hat trick of coupon dollar debt defaults.
In a cash flush market with an uneven distribution of liquidity, smaller players still grapple with liquidity pressures evidenced by the K200.1million in the 91-day paying 14.0%, 880bps below inflation.
Thursday’s auction absorbed K1.2billion of the K1.4billion of appetite, falling short by a whisker to meet the K1.3billion auction target.
Demand for bonds is likely to extend into the second quarter as the central bank furthers its bond buy – back program as part of a domestic debt restructure program. Yield compression observed in the secondary market for the long end is forecast to extend to the primary market but will nonetheless be constrained by rising inflationary pressure.
The Kwacha Arbitrageur