State Pension Fund locks ZMW1.2bn in 15yr BOZ assets...
• Auction was 96% subscribed with ZMW1.4bn allocated
• Yield on 5yr bonds rose 221bps to 20%
By Chief Market Analyst
The Bank of Zambia sold ZMW1,464mn worth of long dated assets (bonds) in the third auction of the year 2018 (03/2018/BA) held on Friday 29 June. On offer was ZMW1.65bn with bids totalling ZMW1.94bn yet only ZMW1.46bn was allocated. This translated to a 0.96 bid cover ratio. The auction skew was 89% of the entire allocation locked in the 15-year tenor at a yield or return of 17.5% (a 100bps – 1% - decline from 18.5% in the last primary). See below the auction appetite distribution skew per tenor as complied by the ZBT market analysts.
The state pension fund came in to save the day locking up about ZMW1.2bn in 15year BOZ assets at 17.5%, the Zambia Business Times carried in their research note on 29 June. Interestingly yields on the 5yr point dubbed the sweetest and most liquid spot on the Kwacha a bond curve, edged higher 221bps to 20% yet only accounted for 3.5% of the asset appetite at ZMW69mn in bids. The 2yr tenor followed an identical pattern edging 210bps higher to yield 18.5% from 16.4% in the last primaries.
With anaemic treasury bill auctions it was somewhat expected that Friday 29 June auction would be poorly subscribed. What becomes very evident is that offshore investor participation has waned with a cautious investment approach in Kwacha assets following the markets pricing in news around a delayed IMF program in addition to noise around unsustainable debt levels. It could also be a sign of liquidity concerns with market players especially if concentration of the auction is skewed towards one Pension Fund. See below the term structure of Kwacha interest rates comparing the current bond yields to previous auction levels. Increased focus is being given to the Kwacha debt market because the Finance Ministry in the budget alluded to attaining a 60% (Kwacha debt) : 40% (foreign currency denominated debt) skew to attain a cost optimal funding mix for the state’s fiscal agenda. However, the treasury bill undersubscriptions lately seem to signal that the Ministry of Finance is behind in its Kwacha funding escapade.
The next bond auction will be exactly 2 months from 29 June. “The anaemic treasury bills auction subscription is misaligned with the governments agenda to use the domestic money markets to fund its budget needs. We estimate that the MOF is YTD shy of ZMW4bn in 2018 going by the undersubscriptions observed. However, we can laud the Revenue Authority for exceeding revenue targets because clearly that’s another source of government funding. Appetite for Kwacha assets is fading so fast but is a phase that will go after the fiscal challenges are dealt with,” Chief Market Analyst for the Business Times said in a note.