Bond yields have not risen in tandem with inflation largely because investors are not bringing enough funds to bond auctions to compel the government to raise interest rates, the Bank of Botswana’s (BoB) Director of Financial Markets, Lesego Moseki, has said.
Moseki was responding to a question from The Business Weekly & Review at an economic briefing in Gaborone this past week. The question had noted that while inflation has now reached 12.7 percent and seems poised to remain elevated over the medium-term, government bond yields have not tracked it as they have done in other markets like South Africa, the US, the UK and Japan. Given the current high levels of inflation in Botswana and the persistence of global inflation, analysts say investors require higher yields to be offered by the government in order to earn a positive real return from the assets.
What then will cause the government yield curve to rise since it has been stable for the past few auctions? “If we see demand, money coming, then we should be able to gradually increase so that investors can protect the value of their investments,” Moseki said in response. Yields on government bonds have had to go up to try to bring in money. Government bond yields subsequently rose in late 2021, leading to higher uptake in them. This was indicated through the 10-year bond (BW011) that saw an uptick in yield in 2021. The recent auctions of government bonds have demonstrated that investors are bidding for higher yields than in the past few years when inflation was muted. While Moseki noted that bond yields have been trending upwards, he said it is “probably not as much as you would have expected”.
Asked whether the central bank is not concerned since real interest rates are negative across the yield curve, he answered: “We are not happy. That is why the central bank is doing everything to fight inflation so that ultimately we could have positive real interest rates because negative real interest rates diminish the value of the funds that are invested in the bond market.” According to Kgori Capital, during the first quarter of 2022, there were three government bond auctions held where P4.5 billion of bonds and T-Bills were offered. Demand was moderate, with P5.9 billion of bids received.
Antwi, Portfolio Manager at Kgori Capital, said the auctions were under-allotted but the allotment ratio (actual allotment divided by securities on offer) increased to 70.6 percent from 57.4 percent in Q4 2021. The bulk of the allotment was at the short end of the curve where P2.3bn (72.9 percent of total allotment) of T-Bills were issued. “Bond yields appear to have stabilized, but there is still more supply pressure expected as government plans to run a deficit budget for the 2023 financial year which is expected to be partly funded by local bond issuance,” said Antwi.