Market watcher, Databank, has advised that investors position their portfolios in short-to-medium securities with high coupon rates ahead of any unexpected price rally.
“For secondary market trades, we recommend an opportunistic buy in low to mid-duration T-bonds (short-to-medium residual maturities with high coupon rates) to position portfolios ahead of the unexpected price rally,” the asset management company said in its half review of the market and outlook.
The surge in the country’s consumer inflation, with elevated uncertainty about its future path, propelled nominal yields, rising by over 1,000 basis points (bps) across the 91-day Treasury bill, which rose by 1,311 bps to the 364-day bills, by 1,078 bps in the first half of 2022.
Further to this, Databank noted that the Bank of Ghana’s inevitable monetary tightening added further push to short-term yields as investors priced in further rate hikes.
Consequently, there has been a flattening of the Treasury yield curve on account of the rapid climb in yields for short-term maturities, compared to the intermediate to long-term maturities.
“The rapid increases in yields at the front-end of the curve have exerted downward pressure on bond prices with sharp portfolio losses. Consequently, we view the weekly T-bill auctions as a primary market opportunity to offset the losses on bond portfolios,” the investment bank highlighted.
Despite lingering upside risk to inflation, Databank observed a sharp moderation in the rate of increases in inflation for June 2022, suggesting the inflation peak is near.
Accordingly, the recent Treasury bill auctions showed the pace of increase in nominal yields appears to be slowing.
The market watcher suggested that this may be an indication that yields for T-bills could be approaching their peak levels while bond yields flatten along the 29 percent to 30 percent range.
“Without new bond issuances to reset the yield curve, we expect bond yields to hover around the 29 percent to 31 percent area in 2H22,” Databank projected.
Liquidity crunch impacts investor demand in 1H22
Given the policy-induced squeeze in market liquidity, the Treasury struggled to achieve its borrowing targets in first half of 2022.
Although the Treasury accepted virtually all bids tendered to raise GH¢27.6billion equivalent to US$3.45billion, it could not meet the T-bills target of GH¢31.67billion, equal to US$3.96billion.
This shortfall translated into a financing gap of GH¢4.07billion, equal to US$508.96million in the first half of 2022, intensifying the potential borrowing pressure with elevated yields in second half of 2022.
The assets management company noted that the tight cedi liquidity also weighed on secondary bond market trading, suppressing total trade volume by 13 percent, year on year (YoY) to GH¢81.11billion (US$10.14bn) in 1H22.
The bond market closed 1H22 in a net-selling position as banks sought to unlock liquidity while offshore investors exited their cedi exposures.
The resultant price losses dragged down the Databank Bond Index (DBI) to 88.54 points (pts), thus, -14.96 percent in 1H22, with a weighted yield-to-maturity (YTM) of 28.43 percent.