At the November 25 auction, three of the four notes offered by the Bank of Botswana (BoB) to bidders recorded increases in their stop yields of just five basis points or less. However, the yield on the six-month treasury bill rose by 37 basis points.
The BoB, as government’s banker, conducts monthly auctions of short-term treasury bills as well as medium and bonds to primary dealers who are exclusively banks. At the auctions, the dealers compete to lend to the government by offering the yields they are seeking, with the BoB deciding the 'stop-out' yield or the maximum level of interest it is willing to pay the dealers on the particular securities on offer.
Parliament approved the doubling of government’s domestic debt programme to P30 billion in September 2020, in order to fund the deficits arising from the pandemic and other budget needs.
Since then, yields have been rising across the range of notes offered by the central bank, particularly on the shorter end of the curve, leading the Ministry of Finance and BoB to seek dialogue with capital market participants.
“This is largely attributable to demand and supply dynamics as well as pricing,” Kgori Capital portfolio manager, Kwabena Antwi told BusinessWeek. “The government has significantly increased the pace of bond issuances over the past two years which is in excess of market demand. “Secondly, in 2022, the government has been reluctant to accept higher bids on its bonds resulting in low issuances or failed bond issuances.”
While yields stabilised for most of the notes on offer at the most recent auction, the BoB did not allocate the P150 million it was offering under the 2043 bond, which is government’s longest maturing bond.
The 2043 bond received seven bids amounting to P92 million but was unallocated as bidders asked for yields as high as 14%. The stop-out yield on the bond has been climbing from about 5.59 percent in September 2020 to 8.45 percent in June this year.
Other analysts have said part of the factors driving the yields upward are negative evaluations by sovereign credit rating agencies such as Moody’s, runaway inflation which has forced the BoB into three consecutive increases in interest rates this year, and bidders’ comparing the returns in the local market with those across the border in South Africa.
Antwi said it was likely that yields would continue rising and added that returns on long bonds were negative in real terms as they were around 8.5 percent whilst inflation is hovering at 13.8% year on year.
“The expectation for yields is that they should rise as government needs to fund its fiscal deficit,” he said. “However, it is dependent on government actually accepting higher bids which thus far in 2022 it has somewhat resisted.”
From a small surplus declared for the 2021–22 financial year, fiscal authorities expect the current year’s budget to produce a P7.7 billion deficit, which has been aggravated by a slew of tax relief measures implemented from August to cushion Batswana against rising inflation.
Antwi said while the local market had 'ample funding' for both government and the private sector, all issuers would need to offer higher rates on their bonds to offer a spread over the yield on government bonds.
