Treasury market suffers pullback in demand conditions

The Treasury suffered a pullback last week as investors’ demand for Treasury bills (T-bills) fell by 43 percent, the market’s first under subscription in 17 consecutive weeks.

This marked a shift from the strong investor demand that had characterised the market throughout 2024, particularly by banks seeking safety at the shorter end of the market, following the domestic debt exchange programme (DDEP) and elevated lending risks due to the prevailing macroeconomic situation.

Analysts point to a recent Bank of Ghana (BoG) policy adjustment – the three-layered Cash Reserve Requirement (CRR) for banks – as the key culprit. Analysis of the directive showed that approximately GH¢16.2billion (US$1.2billion) could flow from banks to the BoG on the back of the new requirement policy effective yesterday, resulting in a tightening of cedi liquidity and a potential appreciation of the cedi in the short-term.

Last week’s increase in metric for banks appears to have dampened their appetite for Treasury bills.

Banks, faced with the need to bolster their reserves to comply with the new CRR levels, appear to be prioritising shoring up their liquidity over investing in Treasury bills.

“Investors’ demand for T-bills fell below the treasury’s target in last week’s money market auction, as banks with loan-to-deposit ratios below 55 percent prepared to increase cash reserves to the respective required levels,” the research arm of Databank said in a note.

This was corroborated by analysts at Apakan Securities, which added: “We believe the three-level CRR adjustment by the Central Bank last week triggered the pullback in demand conditions as banks mull over the policy action”.

Despite the decline in demand, the treasury accepted all bids placed, raising GH¢2.35billion. This fell short of the intended target of GH¢4.16billion, with the shortfall impacting the maturity coverage ratio, which dipped to 0.60x – a level last seen in April 2022.

This brought the total value successfully raised by the Treasury to GH¢19.9billion in March 2024 through its issuance of T-bills. This was 17 percent lower than the previous month – February 2024.

These funds were used for a combination of budgetary support and the refinancing of maturing bills with a total face value of approximately GH¢14.47billion

Despite the under subscription, there was a silver lining for the government as the cost of borrowing dipped marginally.

Even with the under-subscription, yields on the treasury bills continued their downward trend, albeit at a slower pace than previously observed.

The 91-day bill dipped by 25 basis points (bps) to 25.75 percent, while the 182-day and 364-day bills also saw decreases of 25 bps each to settle at 28.25 percent and 28.85 percent respectively.

Analysts anticipate a continuation of this trend, albeit at a slower pace, in the upcoming auction scheduled for Friday, April 5, 2024.

The Treasury aims to raise GH¢2.81billion through this auction to refinance maturing obligations valued at GH¢2.58billion.

For context, yields maintained a downward trajectory in March 2024, with the 91-day, 182-day and 364-day bills closing at 26 percent (down 128bps), 28.5 percent (down 125bps), and 29.1 percent (down 120bps), respectively.

While the treasury bill auction under-subscription indicates a potential challenge in the short term, the continued decline in yields suggests a cautious optimism in the market.

The recent policy adjustments by the central bank come amid ongoing battle with inflation.

Analysts predict a slower pace of yield decline in the coming months due to the CRR adjustment and a potential slowdown in the disinflation process.

The next auction on April 5 will be closely watched to gauge investor sentiment and assess the full impact of the apex bank’s tightening measures on the nation’s short-term financing efforts.

“We expect the CRR adjustment to drain GHS liquidity in the market and soften demand for T-bills. However, we still foresee yields on T-bills declining this week, albeit at a slower pace,” Apakan remarked.

On the secondary market, analysts also perceive a net-offered position on the market this week as the CRR amendment takes effect.

Last week, the holiday-shortened trading period and the subdued investor sentiment towards bonds weighed heavily on trading activity, causing trading volume to shrink to the third lowest level this year.

Total traded volume tumbled to GH¢355million last week from GH¢564million the previous week. Market activity hovered around the medium to long-term papers. The new bonds dominated market activity, accounting for approximately 99 percent of the total traded volume. Feb-2037 (CPN:9.85 percent) and Feb-2036 (CPN:9.7 percent) were the most actively traded papers, settling at 14.63 percent and 13.54 percent, respectively.

“Moving ahead, we expect market activity to remain tepid as bond yields continue to pale in comparison to treasury bill rates, deterring investors from engaging in significant trading activities,” Apakan Securities projected.