Surprise surprise, investors do not want or need very short instruments but neither are they interested in anything longer than ten years
The two debt auctions of this week confirmed a trend that has surfaced from around May last year. Shorter instruments are popular but only around the one-year mark while longer instruments are the darling of the investment world, but only out to seven years.
With Wednesday’s Treasury Bill auction, something happened that has not occurred in a very long time – an offering was undersubscribed, and it happened twice. Glossing over the results it struck me immediately that both the 91 and 182 day TB s did not perform well. For the first, the Bank of Namibia offered N$450 million but found buyers for only N$362 million, leaving a not insignificant 3-month deficit of around N$90 million. For the second instrument, the 182 day TB, the bank was seeking N$400 million, again only managing to get N$386 million. Surprisingly, the playing field was rather crowded with 11 bids for the first and a whopping 25 for the second. Still, all the bids together failed to make the offer mark.
But the third instrument, the 364 day TB, blew the ship out of the water, clearly reverting to trend with an almost double oversubscription. Here the bank was looking for another N$450 million and it got offered an impressive N$853 million, almost twice what it put up, from a decent 14 bids.
It was however, the switch auction of Thursday that shed the most light on liquidity, demand and future expectations. The bank offered to switch N$326 million from GC18 for which bids worth N$415 million were received. This indicates the willingness of investors to accept the switch offers, but the revealing part lies in the maturity cycle. As with previous switch auctions, the shorter instruments are vastly more popular than anything longer than ten years. The bank staggered the amounts strategically, starting with a conservative N$30 million for GC20, ramping it up to almost N$80 million for GC25, and then gradually bringing the ceiling down to N$20 million, then N$10 million, and finally a paltry N$500,000 for GC45.
Here again, the cycle tells it all. The shorter offers for GC20, GC22 and GC25 were comfortably oversubscribed, but the seven bonds from GC27 to GC45 managed to switch only the nominal, for only one or two investors in every case.
The bond trend is easy to explain. The pattern has remained fairly consistent for almost a year. There is sufficient available liquidity and a healthy appetite for government paper not exceeding ten years maturity but after that, it falls off a cliff.
The surprise pattern of the TB auction is not that easy to fathom.
My first response was that banking liquidity must be under pressure again. Here I checked the daily liquidity position and found to my surprise it has consistently improved from the lows in March and early April. Granted, liquidity is not as comfortable as September last year but make no mistake, it is not nearly as bad as April last year. Even Repos and BoN Bills which hit highs early in April, have come down by about N$140 million and N$230 million respectively.
These levels suggest there must be some other reason why the shorter TBs disappointed, and another different reason why ten years out is about the maximum investment horizon.
I can only speculate but I believe that especially banks, are holding back on the short TBs, not because the rate or the maturity put them off, but simply because they need the money themselves, not to patch holes but to lend out. I am waiting for the banking stats to see if this may be so, but if I bring various other indicators into the mix, it seems that there is a not-insignificant revival in credit or at least in demand for credit. For confirmation, I will have to wait for the new Private Sector Credit figures but I am optimistic that we will now start seeing a gradual improvement.
For the complete lack of interest in the longer bonds, it is obviously influenced by trading desk policy, and that mostly by the commercial banks where the favourite window is five years. They are willing to allocate only a certain percentage of reserves to the next five year cycle. It is clear from the auction results that investors have bought into the switch mechanism and are happy to make the change at rates I deem reasonable given the government’s current predicament.
As an aside, the switch auctions have been successful beyond expectation. At some of last year’s auctions, the government managed to improve its cashflow by more than one billion dollars and that from a single event which took only a few hours to complete. Even this week’s more conservative offer helps to improve government cashflow significantly without changing anything to the bigger debt dynamics. It is now only a matter of stimulating more appetite for the instruments beyond ten years but I believe that will come as the economy gathers momentum and as investors gain confidence in the health of sovereign finances twenty five years from now.