Analysts: BoT to flatten bonds curve

DEBT analysts are of the view that the Central Bank is out to flatten the treasury bond yields curve if the new calendar has anything to go by.

The analysts said the government bond yields started to bubble last year and in 2023/24 calendar the central bank reduced some issuance frequencies while omitting on the book the 7-year, termed as an underperformer.

“In general the new issuance calendar aims to slow down the rapid increase in yields,” said the CEO of Zan Securities, Raphael Masumbuko.

The CEO of the largest brokerage firm in the country said this is achieved by distributing the issuances more evenly across medium-term papers, in order to reduce focus on the long-term end.

“As a result medium-term, such as the 5-year and 10-year bonds are likely to attract higher subscription rates in auctions, which has not been the case in the past,” he said.

Additionally, the poorly performing 7-year treasury bond has been removed from the issuance calendar due to its consistently low subscription rates.

Alpha Capital Head of Research and Analytics Imani Muhingo said the yield curve is already elevating since mid-last year as the Monetary Policy Committee (MPC) advises for less accommodative measures.

“One possible consequence of shifting the weight to the medium-term notes is the flattening of the yield curve,” Mr Muhingo said.

Despite substantial oversubscriptions, the frequency of the 20 years and 25 years auctions played a role in raising their yields in the secondary market due to increased supply of the tenors and an upward trend on the yield set by the auctioneer—the central bank.

“Lowering the frequency of auctions of the long-term tenors shall induce scarcity of the notes hence investors’ willingness to purchase the securities at relatively higher prices,” he said.

The effect of high bond prices affects the rising pace of yields of long-term bonds, meaning that even if the yields shall maintain an upward trajectory, the pace shall be lower compared to recent months.

On the other hand, Mr Muhingo said, the increased supply of the medium-term notes shall most likely weigh on their prices and consequently raise yields at a faster pace compared to recent months.

“The central bank is still the most significant trendsetter in regard to the direction of treasury yields as prices in the secondary market are highly determined by the direction of bond prices in auctions,” he said adding “We believe bond prices shall keep dropping, at least in the near future.”

According to the monetary policy statement, the central bank shall maintain a less accommodative stance in the next six months in order to limit liquidity injections, especially with the credit growth to the private sector standing twice the target for 2022/23.

In addition, Orbit Securities said in their weekly market synopsis that the new calendar “unveils some noteworthy changes”.

“Currently, government bond yields have been rising as investors demand a higher premium for these securities,” Orbit said.

Analysts said probably the most surprising move was to lower the 20 years and 25 years auctions from frequencies of six and seven in the previous calendar respectively, to the current annual frequency of three for each.

“The move somewhat contradicts the government’s strategy of lengthening the debt maturity profile,” Mr Muhingo said.

Nevertheless, the weight has been transferred from the long-term tenors to the medium-term tenors, with the highest frequency weighed on the 10 years tenor.

The 10 years bond shall be auctioned six times in the 2023/24 fiscal year, followed by the 2-year, 5-year and 15-year tenors which shall all be auctioned five times each.

During the just-ended fiscal year, the 2-year and 10-year bonds were auctioned four times and the 5-year auctioned three times, similar to the year ahead the 15-year five times.