Rising treasury yields pose challenges for Government debt sustainability
The Government is currently facing a significant challenge as yields on the Treasury market continue to rise, posing a substantial risk to the government’s ability to sustain its debt.
This comes in the wake of the unprecedented domestic debt exchange programme (DDEP), which has further complicated the government’s financial situation.
As yields on Treasury bills increase, the cost of government borrowing rises, making it increasingly challenging to manage outstanding debt and meet future financial obligations.
Yield Increases in Recent Treasury Bill Auction
During the most recent Treasury bill auction, market participants witnessed marginal increases in yields, aligning with market expectations. The 91-day bill experienced a 24 basis points (bps) increase, reaching 20.80 percent, while the 182-day bill rose by 26 bps to 23.62 percent. The 364-day bill recorded the most substantial jump, increasing by 43 bps to 28.02 percent.
Implications of Rising Yields
The escalating Treasury yields have significant implications for the government’s borrowing costs and debt sustainability. As the cost of borrowing increases, the government finds it increasingly challenging to manage its outstanding debt and meet its financial obligations. This situation calls for strategic measures to address the rising yields and restore stability to the country’s debt management framework.
Government Measures to Address Escalating Yields
In an effort to address the challenges posed by escalating Treasury yields, the government took measures to trim off bids towards the end of Q1-2023. By capitalizing on strong demand for bills and readjusting its cost of borrowing downwards, the government sought to alleviate the burden of rising yields. This approach resulted in significant yield reductions during this period. For example, the yield on the 91-day bill dropped from 35.36 percent in Q4-2022 to 19.39 percent in Q1-2023. Similarly, the yield on the 182-day bill declined from 35.98 percent to 21.44 percent, and the yield on the 364-day bill fell from 35.89 percent to 25.66 percent.
Market Projections and Challenges Ahead
Despite the government’s efforts, market experts anticipate continued fluctuations in Treasury bill yields in the near term, with the potential for further increases. However, the real return on Treasury bills is expected to remain negative until inflation returns to a single-digit figure or drops below 20 percent. The projected range for Treasury yields in the near term is estimated to be around 20 percent to 25 percent.
Although the market initially anticipated a significant drop in Treasury yields to a range of 15 percent to 18 percent by the end of Q3-2023, the current trend suggests a persistent rise in yields, even amid expectations of securing an IMF bailout. This raises concerns about the sustainability of the government’s debt and its ability to meet its financial obligations in the long run.
Challenges in Treasury Bill Auctions and Debt Obligations
The recent Treasury bill auction reflected the ongoing phenomenon of under-subscription, as investors tendered GH¢3.18 billion, falling 7 percent short of the target size of GH¢3.43 billion. This marked the third consecutive week of under-subscription, indicating a waning demand influenced by tighter liquidity conditions in the market. As a result, concerns are growing about the government’s ability to meet its debt obligations effectively.
Impact on the Secondary Bond Market
The impact of rising yields extends beyond the primary market to the secondary bond market. While activity in the secondary bond market remained fairly active, there was a 25.45 percent decline in traded volume. Notably, the new bonds continued to attract investor interest, accounting for 80.53 percent of the total traded volume. Among these, the Feb-2027 bond with a coupon rate of 8.35 percent garnered the most attention, constituting 85.89 percent of the new bond volumes. Investors also shifted their focus towards shorter-dated papers, with the May-2025 and Dec-2026 bonds being the most actively traded among the older bonds.
Outlook for the Secondary Bond Market and Fundraising Challenges
Looking ahead, the secondary bond market is expected to maintain its level of activity. However, the challenges lie in the primary market, where the government continues to struggle to meet its fundraising targets. For the third consecutive week, the government fell short of its target at the Treasury bill auction, marking the fourth occurrence this year. While GH¢3.18 billion was raised, it fell 7.21 percent short of the GH¢3.43 billion target.
Furthermore, liquidity action in the old government bond market weakened compared to the previous week, and the upcoming auction aims to raise a more modest GH¢2.08 billion. Although the overall volume traded in the market increased by 12.95 percent due to heightened trading activities in Treasury bills, the yield action was generally negative, with instruments trading at lower yields compared to the previous week.
The Ghanaian government faces a significant challenge as Treasury yields continue to rise, placing the sustainability of its debt at risk. The escalating yields raise concerns about the government’s ability to manage its outstanding debt and meet future financial obligations. While the government has taken measures to address the issue, market experts project further fluctuations in Treasury bill yields and anticipate ongoing challenges in meeting fundraising targets. As the government navigates this complex environment, strategic actions and a comprehensive debt management framework will be crucial to restoring stability and ensuring long-term financial sustainability.
