Zambian bills more attractive than bonds

One-year money is paying 20.5001%, higher than all bond tenors


It is currently more attractive to lock up cash in kwacha treasury bills than buying long dated bonds. Given the current level of yields versus the single digit inflation, real yields are positive and wide. Investors are overcompensated for the level of sovereign risk taken in Zambian assets.

In the last treasury bill auction (13 Sept) yields on kwacha treasuries peaked with zero change in levels from a fortnight earlier. Demand for government assets has declined due to liquidity and concentration risk concerns. The Bank of Zambia fortnight (T-bill) auctions have for the last few months been under-subscribed as more and more players shy away from money markets. Asset sell off pressure has increased with most offshore players with maturing kwacha assets opting not to re-invest (or roll over). They have opted to convert kwacha investment proceeds to

Term structure of kwacha interest rates Dec 17 versus Sep 18 (YTD)

Currently the most attractive investment tenor on the yield curve is the 1-year T-bill paying 20.5001%, higher than any other tenor on the curve.  Appetite in all T-bill auctions has been in the 1-year which takes up circa. 85% of the debt sales.

Elevated yields to drive higher fixed deposit costs

With T-bills within 14 – 20.5001% the markets have started to price in higher cost of fixed deposits which are priced at a spread above T-bill yields as benchmark.

Elevated treasury yields reflect potential interest rate upward spiral as most transactions reference liquid treasury bill points such as 91-day and 183-day T-bill plus a liquidity spread to determine over deal pricing.

With governments intent to fund its fiscal programs using domestic money markets under-subscriptions show that the state is behind in its borrowing plans. With the national budget announcement on the horizon, the markets wait to see how the 2019 fiscal programs will be funded aligned to the austerity measures announced in June this year.

For cash flush units, this is the best time to lock up funds for higher yields. However, for funding purposes, the cost is rising rapidly.

Next treasury bill auction will be on 28 September with K950-million on offer.

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