One-year treasury bill gold rush; Pre-bond Kwacha rally next week

The largest denomination of Zambian legal tender. The bank of Zambia had its treasury bill auction on 15 February which was heavily skewed to the one year tenor. The first bond auction of the year will be held next week friday.

THE Bank of Zambia sold a one billion Kwacha in treasury bills on Thursday the 15th February a week ahead of the first bond auction of the year 2018. On offer was ZMW950million across a spectrum of tenors ranging from 91days to 1year of which 87%  appetite was for 1year paper paying a yield of 16.5%. This auction pushed the one year return on investment to 16.5% – 50bps higher than a fortnight ago. The one-year tenor is the most attractively priced bucket on the yield curve. Minimal interest was shown in the other tenors namely 3m and 9m whose yields were 9.7999% and 9.3562% (a 64bps slide) respectively.

“We have observed this skew for over 6 months were the one-year bill has been priced at between 16%-16.5% which has caused this skew the market is observing in the short end of the Kwacha term structure of interest rates,” a trader that declined to be named said.

With a bond auction a week ahead it is forecast that the Kwacha could get support betting on offshore participation given the interest rate views as they search for yield. The usual appetite for 5year and 7year paper is expected though the intensity of appetite will be vivid after the market gauges’ dollar inflows in next week’s trading. Inferring from the last (4) treasury bill auctions, yield moves not exceeding 100bps are expected. However, after the news around IMF dismissing Zambia’s recent borrowing plan, yields could rise higher than expected because the development on 16 Feb fades prospects of an IMF deal anytime soon and will force government to maximise what it can get from the domestic market. Outlook for long date bonds just got bearish overnight, Lead Analyst for the Business Times said.

As for offshore participation, we could just expect a higher influx of players hungry for yield and if this happens the Kwacha will rally higher to ZMW9.55/USD – ZMW9.65/USD ceteris paribus.

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