Investors remain cautious amid easing inflation

Despite the drop in headline inflation for July 2024, investors remain cautious on the Treasury bill (T-bill) market.

Although government will today meet its debt obligations and make coupon payments on new bonds, market observers anticipate continued cautious trading in view of government’s high demand and attractive Bank of Ghana bill yields.

The state has relied almost exclusively on T-bills to finance it’s obligations, as it is unable to access the wider market. Furthermore, yields on the central bank’s open mark operation instruments have proven attractive enough to lure some investors from the T-bill market.

The latest figures show inflation falling by 190 basis points to 20.9 percent, the lowest level since April 2023 – driven by stable food prices and a relatively steady cedi. While this decline suggests an improving economic environment, it has not yet translated into widespread investor confidence.

An investor note from Databank issued yesterday highlights that easing inflation could prompt a reduction in risk premium across the T-bill yield curve in coming weeks. However, the note also emphasises that strong government demand and attractive Bank of Ghana bill yields may prevent a consistent decline in T-bill rates.

As a result, while the inflation data is encouraging, investors are still approaching the market with caution – wary of the upward pressure on yields due to ongoing government financing needs.

Last week’s T-bill auction reflected this cautious sentiment. The 91-day T-bill yield edged up by 1 basis point (bps) to 24.84 percent while the 182-day and 364-day yields each dipped by 1bps, settling at 26.75 percent and 27.85 percent respectively. The Treasury’s efforts to raise GH¢4.9billion fell short with only GH¢4.6billion secured, just enough to cover maturing bills of GH¢5billion. This shortfall underscores the cautious stance investors are taking despite positive inflation news.

Similarly, a report from Apakan Securities observed a mixed performance in T-bill yields last week, attributing it to the lower inflation figure. The Treasury accepted all bids but the auction was undersubscribed by 7 percent, with a total GH¢4.62billion tendered against a target of GH¢4.96billion.

Apakan anticipates yields to remain stable, with demand potentially increasing due to upcoming coupon payments on new bonds. However, the overall cautious mood suggests that investors are still weighing their options carefully in response to the evolving economic landscape.

This week, the Treasury’s plan to raise GH¢5.32billion through the issuance of 91-day, 182-day and 364-day bills in the next auction – scheduled for Friday, August 23, 2024 – is being closely watched by market participants. With a GH¢5.01billion maturity due next week, pressure on the market to meet these obligations remains high.

Analysts suggest that while the inflation decline is a positive sign, continued allure of high T-bill yields may keep investors on the sidelines cautiously assessing the risk-reward balance.

In the secondary market, trading activities showed a notable rebound last week, with total volume reaching GH¢2.1billion across 127 transactions – the highest level of activity since December 2023. However, the trading was heavily concentrated on the shorter end of the local currency yield (LCY) curve, which accounted for 58.6 percent of the total trade volume. This preference for shorter-term securities indicates that investors are still uncertain about the long-term outlook, despite the easing inflation.

Meanwhile, the bond market also saw robust demand – driven in part by the 190bps decline in inflation. Some investors shifted their focus from short-term debt to longer-dated securities, with the February 2032 bond clearing at 28.05 percent being particularly popular. However, this shift did not reflect a wholesale return to confidence, as overall market activity, while improved, suggests a measured approach by investors.