Low interest rates make govt bonds unattractive

Eric Chiriga/Thomas Mutswiti

ANALYSTS say government bonds are not attractive enough to be fully subscribed because of their long maturing periods and low interest rates.



“Verdana, Arial, Helvetica, sans-serif”>Currently the average 91-day Treasury Bill rate is 185% and compounding the rate for three years will give a better return than holding the three-year paper giving a Consumer Price Index (CPI) rate of return of 164%.


The capital market has been awash with bonds as the government strives to get funds for capital projects, parastatal resuscitation and local authorities reorientation.


The bonds have also been issued to assist government in converting short-term loan to long-term debt.


The government last week invited applications from investors to subscribe for the three-year bond at an interest rate of CPI flat.


The offer closed yesterday.


Recent $500 billion bonds were quoting an interest rate equivalent to the CPI rate.


In spite of the RBZ engineering all forms of incentives to attract investors, the bonds have largely been under subscribed.


Market watchers say there is zero return in investing in bonds because the interest rate offered is equal to the inflation rate.


The interest rate on the bonds is the annual rate of inflation, effectively providing zero real returns.


They believe that in the short to medium-term interest rates will continue to firm and hence fear losing out by holding on to the long-term paper.


A dealer from one discount house also attributed the under subscription to the unattractive terms being given.


Given also the thrust by the Reserve Bank (RBZ) to target an inflation rate of 80% by year-end that would mean a paltry return to the investors.


Economic analyst, John Robertson, said government bonds are always under-subscribed because of the negative real rates of interest.


“The interest rates do not compensate the lender for inflation. At the end of the year the lender gets less for his money,” Robertson said.


He said government’s imposition of prescribed asset ratios on pension funds was also unfair.


The funds are obliged to tender for the bonds.


“Pension funds have become victims of massive redistribution of wealth and pensioners cannot retain their lifestyles,” Robertson said


“Government borrows money for recurrent expenditure and not for investment and it ends up borrowing again to repay another debt.”


Robertson said the government has become a victim of its own policies that are stripping away savings.


Investors would rather rollover their short-term investments than hold bonds as evidenced by the current support being given to Treasury Bills (TBs) issues in the primary market.


There are competing options for the same money that the government wants to raise.


The pension fund manager has the option of investing in the stock market where the realised return has more often than not beaten the fixed income securities even where the rate is floating but without premium above inflation.


Another issue is the liquidity issue.


The bond market in Zimbabwe is so thin that it is very difficult to liquidate the instrument at a fair value or sell the bond without suffering substantial loss of value.


With stocks the pension fund manager simply restructures his portfolio by selling some shares should he urgently need funds.


Pension funds that already meet the prescribed asset ratios are thus turning to the stock market and property section where real returns potential is better.


Pension fund managers also highlighted they were being robbed through requiring them to buy unattractive bonds as prescribed assets and hence suggested that actuarial input be made when the government sets prescribed asset ratios.


They argued that the current 40% requirement at sub optimal rates of return meant that the Zimbabwean pensioner would be very poor at the end of the day yet the manager has a duty to invest where real returns will be realised for the client.


As long as pension funds comply with the prescribed asset ratios they will not subscribe to new issues and instead invest in stock market for long-term capital growth, which will be above inflation or buy Treasury Bills in the secondary market if the rates are attractive.


The undersubscription has also been attributed to the lack of investor confidence in the RBZ on the back of continuous policy uncertainties particularly with regards to interest rates.


The RBZ has been constantly reviewing interest rates and that has meant that those people who take up bonds with rates not CPI linked at any point in time will suffer a considerable amount of interest rate risk.


If interest rates fall during the life of the bond, the holders of the bond will enjoy higher prices and hence portfolio values go up. In the event that such rates go up, the prices of the bonds will fall causing a fall in portfolio values.

This interest risk has been exacerbated by the policy uncertainties that the RBZ has embarked on.


Interest rates are being changed arbitrarily.


Analysts also cited the mid-term monetary policy statement by RBZ governor, Gideon Gono, where he announced interest rates of 180% and 190% for secured and unsecured overnight accommodation respectively and then a week later another 10% rate hike was made.


They said that such policy uncertainties have the effect of undermining public confidence in these financial instruments to the extent that even well structured bonds are being undersubscribed.


One fund manager said he believes that the issues are under-subscribed because the money that the authorities want to raise is too much and the market does not have that kind of money.


“Buildings form the core assets of pension funds and these are not liquid investments such that even if the pension funds were to conform with prescribed asset ratios that would take time,” he said.


To reinvigorate the interest in the government financial instruments, the RBZ should offer a reasonable premium above the CPI to enable investors to realise real returns.


“A rate of CPI plus 10% would give reason to investors to buy the government stocks,” one analyst said.

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