Bond Yields on Cusp of Edging Higher in Tomorrows Auction

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BANK of Zambia will hold its ultimate government bond sale tomorrow 15 December. This bond sale is critical for both government in its quest for year end spending and market players in search of yield. The Central bank will target to sell ZMW900million in the issuance of new paper – 2yr,7yr, 10yr and 15yr assets- and the re-opening of the 3 and 5yr benchmarks.

“We expect yields to rise between 100-200bps, Chief Market Analyst for the Business Times said in a morning note. The fundamentals and the fiscals clearly support this view, he said.

Below is a treasury bill graph of the movement in the 1yr from last bond auction to date. This model used focuses on behavior of the 1yr to extrapolate outcomes in tenors above it.

We have made inference from proxying the long end of the Kwacha Treasury bill curve -365day moves. This point has risen 100bps from 16.5% from 15.5% in the last two months when the BOZ sold bonds. We use the longest point of the term structure of interest rates to extrapolate outcome of the bond curve. The 365day point has seen increased appetite from the market for the reason that it is the most attractively priced which makes any player want to lock in their cash. Last bond auction saw yields rise significantly and sentiment is that this auction will edge yields higher as expectations are that government is desperately trying to fund its operations which have come under strain lately. With a delayed IMF deal, the only option for government to fund its needs is the domestic money markets.

Our analysts expect the usual appetite for 3yr, 5yr and 7yr paper as these are the sweetest points on the Kwacha curve paying between 18.5% and 19.5% (as per last primary auction).

Pension funds will surely go in for 10yr paper as they seek to rebalance their asset liability structure. The shape of the Kwacha curve will reflect the debt distress the nation is going through and the only consolation is that any country is triple A rated for its own debt so borrowing on the domestic market is not an issue though it breeds a crowding out effect at the expense of SME’s.

The market has not seen as much inflows from offshore players that may wish to participate in tomorrows offering.

More articles on Kwacha bond auction.

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