Government grapples with rising yields on Treasury market

Yields on the Treasury market are consistently increasing, presenting a substantial risk to government’s ability to sustain its debt following the unprecedented domestic debt exchange programme (DDEP).

During the most recent Treasury bill auction, yields experienced marginal increases in line with market expectations. The 91-day bill saw a 24 basis points (bps) increase, reaching 20.80 percent; while the 182-day bill rose by 26 bps to 23.62 percent. The 364-day bill recorded the highest jump, increasing by 43 bps to 28.02 percent.

As yields on Treasury bills increase, the cost of government borrowing rises – making it increasingly challenging to manage outstanding debt and meet future financial obligations.

In an effort to address escalating Treasury yields, government took measures to trim off bids toward the end of Q1-2023 – capitalising on strong demand for bills and readjusting its cost of borrowing downwards. Consequently, the yield on the 91-day bill dropped from 35.36 percent in Q4-2022 to 19.39 percent in Q1-2023 while the yield on 182-day bills declined from 35.98 percent to 21.44 percent, and the yield on the 364-day bill fell from 35.89 percent to 25.66 percent during the same period.

According to Apakan Securities’ first-quarter market review, yields on Treasury bills are expected to continue fluctuating in the near-term – with potential for further increases. However, the real return on Treasury bills will remain negative until inflation returns to a single-digit figure or drops below 20 percent. The projected range for Treasury yields in the near-term is around 20 percent to 25 percent.

Although the market initially anticipated a significant drop in Treasury yields to a range of 15 percent to 18 percent by end of Q3-2023, the current trend suggests a persistent rise in yields even amid expectations of securing an IMF bailout.

Issuance size

The most recent Treasury bill auction reflected this ongoing phenomenon, with investors tendering GH¢3.18 billion – falling 7 percent short of the target size of GH¢3.43billion. This marked the third consecutive week of under-subscription for Treasury bills, indicating a waning demand influenced by tighter liquidity conditions in the market. As a result, concerns are growing about the Treasury’s ability to meet its debt obligations.

The banking and investor community is still recovering from negative impacts of the domestic debt exchange programme, which has stifled demand for Treasury bills.

This upward trend in yields is expected to persist as the Treasury plans to secure GH¢2.08billion through the 91- and 182-day bills to refinance maturing debt of GH¢1.98billion. The next Treasury auction, scheduled for June 2, 2023, is anticipated to witness further increases in yields due to elevated demand for government bills.

Secondary Market

The impact of rising yields is not limited to the primary market alone. In the secondary bond market, activity remained fairly active – albeit with a 25.45 percent decline in traded volume. The new bonds continued to attract investors’ interest, accounting for 80.53 percent of the total traded volume. Among these the Feb-2027 bond with a coupon rate of 8.35 percent garnered the most attention, constituting 85.89 percent of the new bond volumes. As for the old bonds, investors shifted their focus toward shorter-dated papers, with the May-2025 and Dec-2026 bonds being most actively traded.

Looking ahead, the secondary bond market is expected to maintain its level of activity. However, the challenges lie in the primary market where governmen’s ongoing struggle to meet fundraising targets raises concerns. For the third consecutive week, government fell short of its target at the Treasury bill auction, making it the fourth occurrence this year. While GH¢3.18billion was raised, it fell 7.21 percent short of the GH¢3.43billion target.

Moreover, liquidity action in the old government bond market weakened compared to the previous week, and the upcoming auction aims to raise a more modest GH¢2.08billion. The overall volume traded in the market increased by 12.95 percent due to heightened trading activities in Treasury bills. However, the yield action was generally negative, with instruments trading at lower yields compared to the previous week.