AFRICA DEBT-Uganda looking like Africa's "monster trade"
Oct 08, 2011
JOHANNESBURG - Yields on Ugandan Treasury bills may not have reached their peak despite rising above 20 percent this week, while those in Kenya are expected to move higher at a Treasury bill auction next week after the central bank raised its benchmark lending rate.
JOHANNESBURG - Yields on Ugandan Treasury bills may not have reached their peak despite rising above 20 percent this week, while those in Kenya are expected to move higher at a Treasury bill auction next week after the central bank raised its benchmark lending rate.
UGANDA
Only a year ago, yields on Ugandan Treasury bills were 6 percent or lower but this week they jumped above 20 percent and are expected to continue their ascent in the coming days, making them highly attractive to foreign investors.
On Tuesday, the Bank of Uganda raised interest rates to 20 percent from 16 percent in August to curb runaway inflation.
At a Treasury bill auction the following day, yields on the 91- and 182-day bills rose to 21.4 percent and 22.5 percent, from 17.4 percent and 18.5 percent at the last auction a fortnight ago. The yield on the 364-day instrument increased to 24.1 percent from 19.8 percent.
"It was around 6 percent not more than one and a half years ago," said Ahmed Kalule, financial markets dealer at Bank of Africa Uganda. "To move from there to here is a big jump."
Yields are likely to rise further if inflation remains around the current level of 28.3 percent, Kalule said.
"I don't think they've reached their peak," he said. "We're still moving northwards... No investor would want to get a yield that's lower than the inflation rate. That wouldn't be value for money."
The central bank accepted bids worth 95 billion shillings ($33 million) though its target was 107.5 billion shillings. The 364-day bill was oversubscribed but the bank fell short of its 30 billion shilling target for shorter-dated instruments.
"When liquidity is tight you want to lock your money at the highest levels you can get and the highest you can get is maybe in the 1-year," said Kalule. "That's why most people went for that."
Stephen Bailey-Smith, head of Africa research at Standard Bank in London, said Ugandan yields would be attractive to foreign investors at their current levels.
"Uganda is at a very critical point. I think it looks very interesting for investors," he said. "It looks very much like Mozambique looked this time last year. Since then, the metical has appreciated by about 28 percent against the dollar on a yield of around 17.5 percent.
"With Uganda's T-bill rates now well above 20 percent, a long shilling position looks like the monster trade for African local rates this year."
KENYA
Investors are seen bidding aggressively and testing the government's willingness to borrow at high cost next week in response to the central bank raising its benchmark lending rate by 400 basis points.
The Central Bank of Kenya will sell 3 billion shillings ($29.51 million) of 182-day Treasury bills and 4 billion shillings of 91-day bills next week.
Kenya's central bank surprised the market by raising its lending rate to 11 percent from 7 percent to stem the steep fall of the shilling -- which has lost 26.5 percent this year -- and tackle inflation now at 17.3 percent.
"The yields are edging further up in the coming auction especially coming after the MPC raised the Central Bank Rate by 400 basis points," said Peter Njuguna, a fixed income trader at Kenya Commercial Bank.
Njuguna said he expected improved appetite on the fixed income market with the MPC decision out of the way, but added there was a preference for short-term paper including the 91-day Treasury bills.
The weighted average yield for Kenya's 91-day Treasury bill, which sold on Thursday, jumped to 14.84 percent from 13.74 percent, the highest rate this year.
The central bank also sold a 364-day Treasury bill , with yields climbing to 14.5 percent from 12.54 percent at its last sale, while that of the 182-day paper also rose to 14.28 percent from 13.49 percent.
James Mutuku, a fixed income trader at Standard Chartered Bank, said as interest rates were on an upward trend the bond market might suck in money from other asset classes, especially the lethargic Nairobi stock market.
The central bank has been rejecting some high bids in past auctions, a trend traders expect to continue, while good funding at the interbank level was expected to push more players into the fixed income market.
"The very high bids, outliers, I think we will see them (central Bank) reject them," said Mutuku.
"On the interbank level, that might start to tick upwards on the movement of the CBR but I expect the market to continue being well-funded. I don't expect a liquidity crunch in the interbank market."
NIGERIA
Nigerian bond yields are expected to rise next week as the central bank continues to tighten liquidity to curb pressure on the local currency.
The central bank has been mopping up liquidity through the conduct of open market operations (OMO) after it raised its benchmark interest rate by 50 basis points to 9.25 percent two weeks ago to tackle inflationary pressures.
Traders said the hike, coupled with an increase in yields across the curve, had raised confidence in local bonds.