The Treasury Bills honeymoon is over

The Central Bank has tendered a new batch of Treasury Bills which is the sixth since the resumption of the auction system in August. A Treasury Bill auction system involves the open invitation of bids from qualifying institutions normally referred to as primary dealers and the invitation is accompanied by a stipulation of the bill’s features and these include the issuer, amount on offer, interest rate, tenure among other special features such as tradability and allotment criteria. Between 2013 and 2018 over which government issued Treasury bills to the tune of $8 billion, the determination of yield was preset by government while issuances were not exclusively public.

The TBs market is pivotal in the establishment of a yield curve which is simply a line denoting how much in interest terms would lenders ask for, on Treasury Bills with varying maturities. Typically, Treasury Bills with shorter maturities attract higher yield (interest) compared to long dated paper. The yield curve helps an economy determine interest rates but beyond this a TBs market can be a sentiment barometer given that it represents government on one side and the public as represented by banks holding public funds, on the other. So in instances where public sentiment is turning adverse against government especially with regards to economic management, bids, as shown through subscription levels, usually come in lower and yields tend to be higher than normal.

As shown in the chart below, subscription levels have fallen drastically since the first issue. The first TB issue in August was for $30 million and a 90 day duration, it was oversubscribed at 440%. The second issue was double the amount of the first at $60 million and for a longer duration of 365 days, again it was oversubscribed at 220% even as the average yield came off. From these first 2 issues which were conducted within 2 weeks of each, it can be observed that there was significant appetite for TBs in August and this appetite was not dampened by the duration of TBs. As highlighted earlier, investors normally prefer TBs with shorter durations than those with longer durations, such that they would demand a higher yield as the duration lengthens.

The third issue early in September was for $102 million on a 92-day duration and again subscription levels were overwhelming at 400%. In all the 3 issues, the yield remained low averaging 14.5%. Although there were other factors such as the pressing need by players to satisfy regulatory prescribed asset thresholds within balance sheets as well as the given attractiveness of short dated paper, it can be rightly observed that sentiment was positive at the beginning of the auction system.

Late in September, RBZ tendered a $300 million, 365-day paper to the market. This was the largest single issue since the auction system reintroduction even as it ranked the lengthiest in terms of duration together with the highly subscribed second issue. As the results came, it became apparent that this was a wrong bet by government. The issue had a 27% subscription rate, which was the lowest since the auction system began. In absolute terms the 365-day paper issued in August had a higher allotment at $121 million compared to $81 million for the $300 million issue.  This later comparison is important because it compares like for like in terms of paper duration and although the later issue was bigger it failed to attract as much bids as the smaller issue in August in absolute monetary terms.

The 5th issue in October at half the size of the fourth issue but with similar maturity profile, again failed to attract adequate bids. At $71 million bids, this was the lowest subscription level of the 5 issues. Government only managed to raise a third of the money it hoped to raise. On government’s side, the observation is that since September demands were getting tighter as costs kept escalating in line with inflation and exchange rate. government could therefore not commit on the short end as obligations would keep piling within very short run further worsening the fiscus. If government was to judge by investor reaction on the fourth issue, then the features of the final issue could have been more investor friendly particularly on the duration. The insistence on a longer duration, already shunned by investors in the fourth issue, shows that government could have been in a fix and could not tame back the duration because of piling obligation.

On the investors side, the disparity between the first 3 issues and the last 2 is wide. Investors clearly have no preference for long dated paper and this may represent heightening risk given macro volatility. In an environment where the adjusted yield is plummeting by the day as inflation rises and exchange rate weakens, investors do not prefer locking up their funds in fixed interest securities. The rising inflation is therefore a disincentive on long dated paper, although there are minimal investment alternatives on the market. In other words, the market expects the economy to worsen and particularly inflation to rise over the next 12 months. The low uptake of government securities in later issues also demonstrate the  plunging confidence, which is dampened by falling economic output and generally tightening environment.

Although the sixth issue has a shorter duration which is half the period prescribed in the fourth and fifth issues, it may fail to gain as much traction. Rigidity in terms of allotment as is the case may drag the outcome below expected levels. Use of the weighted average rate model restricts allotment levels. The model can be modified such that actual bids can be used for allotment with the lowest bidder earning allotments ahead of high bids in that respective order. Although this may distort the yield curve it removes the excesses of market manipulation and encourages pragmatism in bidding among primary dealers while aiding overall flows accrued from an issue. Minister Mthuli Ncube has spoken on the TBs subject before, his view in August was that the TBs market’s low yields represented the direction inflation was going to take. At that point annual inflation was well over 250%.

Indeed in a perfect it should, but given that the market uses the weighted average model, there could be manipulation of average yield by a few players representing government’s interests. The uptake of TBs as shown by subscriptions levels should instead be used as a barometre ahead of yields, in terms of gauging market sentiment on economic outlook.

Respect Gwenzi

Respect is the Lead Analyst and Managing Director at Equity Axis. He has 8 years experience in respective fields of finance and media. Particular areas of expertise include Asset Management, Stockbroking and Financial Media. Respect is on a mission to change the course of Financial Media in Africa through digitalization

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