Bond and TB auctions surprise with record levels of investor participation
The Bank of Namibia auction for the government’s internal registered stock that took place on Wednesday set some new records in terms of investor participation. The GC23 bond was oversubscribed an unbelievable ten and a half times with an equally impressive 20 investors vying for the relatively modest allocation of N$60 million.
This was the regular auction for the government’s main securities, the GC23, GC27, GC32, GC37 and the GC43. Most aspects of this auction were fairly normal, with coupon rates ranging from 8% to 10% over the 20-year horizon so nothing our of the ordinary there. The amounts offered were equally modest starting with N$60 million for the shorter maturities, coming down to N$40 million for the longer dates, but still nothing out of the ordinary.
But investor interest wiped all previous records off the table. I have not in the past 25 years ever seen a bond oversubscribed 10.55 times. Typically in our market, when government bonds are oversubscribed 2.5 to 4.5 times it is usually interpreted as a sign of keen market participation. When it goes to this week’s level, it shows a demand for government securities that outstrips the supply by an order of magnitude.
The other four bonds in the auction, from the GC 27 to the GC43, did not show the same exaggerated level of demand but it was still impressive. Furthermore, the competing pool of bidders for these bonds were bigger than those bidding for the shorter GC23.
Just to give an overview of the results, the GC27 was oversubscribed 5.88 times by 38 bidders, perhaps another record while the GC32 attracted bids of 7.77 times the value of the offered allocation. These figures are all outstanding. With the GC37 and GC43, the values reverted closer to normal but still somewhat elevated. The GC37 was oversubscribed a tad short of four times (23 bidders) and the GC43 2.74 times (24 bidders), much lower than the first three bonds but still very respectable numbers.
The overall value of the auction came to N$230 million, a relatively small issuance but it was topped a day later at the Treasury Bill auction where the government collected a cool N$1 billion in short-term financing. Although the 273-day TB and the 364-day TB were respectively oversubscribed only 2.24 and 2.44 times, more in line with the usual auction response, the bids came from a very large pool of bidders, 34 for the first and 41 for the second TB. The only bond that came close to this type of interest was the GC27 with its 38 bidders.
The elevated demand for government securities must be an encouraging sign for a fiscus that I think is devising all sorts of tricks to reign in the 2020 budget, especially given the fact that the books are opened with a N$8.1 million deficit (from lockdown financing) even before the “normal” operating deficit is taken into account.
The auction results also hint at another dynamic. Banks are chasing instruments where the yield is easy, or at least easier than conventional retail banking. This is evident, not only in the daily bank liquidity figures, which have made a tremendous comeback since the lows of January to early April, but also in the so-called intraday average liquid asset ratio, which has been growing steadily since the repo rate was reduced so aggressively late March and early April.
It were much better when this ratio was closer to its medium-term average of around 15%, or even around 12% where the banking industry’s average capital adequacy ratio sits. It shows that banks are harbouring quality assets, while the liquidity that enters the commercial market is impeded. In simple language, the banks are reluctant to extend credit, so they park their money where it is easier to make a profit off the spread.
Drawing reasonable conclusions from this week’s government debt auction is complicated. The economic equilibrium has been upset, the future is uncertain, and borrowers are not keen to go into long-term commitments although there is a huge need for short-term survival financing.
It is very difficult to judge when some form of normalcy will return, given the severe, in many cases unpredictable damage done by the prolonged lockdown but one thing that is certain is that there is more than ample liquidity in the local market to get things going again. The only trigger we are all waiting for, is the announcement that this debilitating lockdown is over – for good.