T-Bill yields projected to drop by 5%
Ghana’s Treasury market has been experiencing volatility as money market yields continue to rise, fueling investor interest in government bills. However, market participants are anticipating a potential decrease in yields by as much as 500 basis points (bps) if the Ghanaian government can secure approval from the Executive Board of the International Monetary Fund (IMF) by the end of the second quarter of this year.
The optimism over the deal has received a significant boost following the formation of an Official Creditor Committee, led by China and France, by the Paris Club. Yields on Treasury market instruments are expected to drop to between 15 percent and 18 percent by the end of the third quarter of 2023 if the US$3 billion facility is approved, and disbursements begin at the midway point of the year.
In its first quarter 2023 review of the market, Apakan Securities mentioned that “We see Treasury yields hovering around 20 percent to 25 percent in the near-term. If the government can secure an IMF executive board approval by the end of Q2-2023, we expect yields on Treasury bills to drop significantly – between the range of 15 percent and 18 percent – by the end of Q3-2023”. However, the real return on Treasury bills will remain negative until inflation returns to a single digit or drops below 20 percent.
Inflation has dropped for the fourth consecutive month to 41.2 percent in April this year, down from 45 percent the previous month. The rate peaked at 54.1 percent in December 2022 and has since been gradually slowing down, prompting expectations that it could reduce to under 30 percent by the end of the year.
Earlier in the first quarter of the year, Treasury yields tumbled following the government’s cost-reduction strategy amid strong demand. As Treasury yields escalated to unsustainable levels on the back of tighter financing options for the government, the Treasury capitalized on the strong demand for bills to trim-off bids toward the end of quarter-one, readjusting its cost of borrowing downward.
As a result, yields on the 91-day bill decreased from 35.36 percent in the fourth quarter of 2022 to 19.39 percent in the first quarter of 2023; while the yield on the 182-day bill decreased from 35.98 percent in the fourth quarter of 2022 to 21.44 percent in the first quarter of 2023. Similarly, the yield on 364-day bills dropped from 35.89 percent in the fourth quarter of 2022 to 25.66 percent in the first quarter of 2023.
Recent auction results highlight a consistent oversubscription of Treasury bills for the sixth consecutive week as at the end of the last two weeks. Notably, the 91-day bill experienced a 31-basis-point increase – reaching 20.26 percent, while the 182-day bill rose by 12 basis points to 22.83 percent. Similarly, the 364-day bill inched up by 10 basis points to 27.36 percent.
Sharing his thoughts, Economist and Research Lead at GCB Capital, Courage Kwesi Boti said: “We could end the year with a 91-day rate of 17 percent or slightly lower. Inflation is still very high, and I am looking at an end-of-year rate of around 25 percent, which means we would not restore positive real returns by then. But I feel that for the government to realize gains from the Domestic Debt Exchange Program (DDEP) properly, it will have to price T-Bills significantly below the levels where they are now”.
