Yields fall at P840m bond auction
Mbongeni Mguni | Wednesday December 18, 2013 15:29
The latest auction is part of the P15 billion Domestic Note Issuance Programme Parliament approved in February 2011 to help finance the budget as well as maintain government presence in the domestic capital markets.
Figures made available after the auction earlier this month indicate that the stop-out yield on all four notes up for grabs fell when compared to the September auction, with bidders willing to accept higher prices. The stop-out yield represents the lowest price at which a treasury bill or bond is sold at, or the highest yield the BoB is willing to give auction participants, who are exclusively commercial banks.
At the recent auction, the stop-out yield on the P340 million treasury bill fell to 3.38 percent from 4.03 percent in September when a similar amount was on offer. Similarly, the yield on 10-year BW008 bond fell to 5.45 percent from 6.8 percent in September with both auctions offering P150 million.
The yield on the BW010 bond, which matures in 2017, fell to 4.7 percent from 4.75 percent although the recent auction offered P150 million from P100 million in September. Government’s newest bond, the 18-year BW011, also recorded a yield decline from 6.49 percent in September to 6.34 percent in December, with the amount on offer rising by one million Pula between the two auctions.
Trend analysis of the highest and lowest bids made between the September and December auctions also indicates that commercial banks were willing to pay a higher price for the government notes.
The banks were particularly willing to accept a higher price of the BW010, with the lowest bid received pegged at 4.15 percent at the recent auction, from 4.7 percent in September. While analysts were unavailable for comment yesterday, lower yields for government-backed notes are generally associated with positive investor sentiment, largely around inflation trends and wealth creation. With its long record of robust sovereign credit ratings and economic stability, government bonds have traditionally been viewed as fail-safe investment vehicles for investors seeking fixed incomes.
By comparison, several European governments have seen their bond yields shoot up, squeezing their treasuries through higher borrowing costs, as a result of investor uncertainty after the global recession. The latest auction also revealed that interest among the commercial banks was generally focussed on shorter term paper. The P340 million treasury bill, the shortest term paper available received a total of 29 bidders, with their bids valued at P980 million against the P340 million on offer.
The banks were also eager to snap up the BW010 bond, which matures in March 2017, putting in bids valued at P347 million competing for the P150 million on offer. Government treasury bill and bond auction recently came to national attention when PAC chairman Nehemiah Modubule queried why commercial banks held exclusive rights to participate in the auctions. The Auditor General similarly noted the trend in a report on the 2012 public finance activities. “The bonds and treasury bills are only sold to the primary dealers such as commercial banks and are not able to be resold as a result of limited issuance,” the Auditor General’s report read.
“The Office of the Auditor General noticed that the government bond market was still nascent with no secondary market trading.”
Responding in Parliament, finance ministry officials said government had given the BoB the responsibility of selecting primary dealers and available information indicated that banks were the only institutions capable of complying with the stringent requirements. “However, anyone can apply,” said a finance ministry official at the PAC’s hearing.
The Auditor General also noted that ministry officials appeared to lack technical expertise on the workings of the bond and treasury bill auctions. “The Office has noted that even though there had been ministry representatives who sat in the Bond and Treasury Bills Committee, they had limited capacity to advise on the issuance of bonds in broad terms,” the Auditor General noted.
The Auditor General noted improvements in the September 2011 and March 2012 issuances with the ministry advising on how much to issue looking at government’s needs.