TB YIELDS NOSE-DIVE AFTER BANK RATE CUTS
DAILY TIMES OCTOBER /05/2010

The reduction of the bank rate from 15 percent to 13 percent starting August this year has led to dwindling yield rates on Treasury Bills (TBs).

Malawi Savings Bank (MSB) notes in its September Financial and Economic report that due to the cut there has been a corresponding general decline in yield rates for TBs, although with a slight time lag.

“For instance, results from the TBs primary trading conducted on 24th September 2010 indicate that the yield rates for all the three tenors have declined considerably when compared to the rates that prevailed before the adjustment of the bank rate.

“The rate for the 91 days tenor declined from above 7.40 percent to 7.14 percent, and that for the 182 days declined from above 11.70 percent to 9.75 percent while that for the 273 days bill contracted from above 12.40 percent to 10.47 percent, the bank says”.

It further points out that the decline in yield rates reflects the reduction in the bank rate and a sudden surge in the demand for the TBs witnessed during the period under review.

“For instance, during the auction conducted on 24th September 2010, investors were willing to purchase an equivalent of K6, 469.61 million worth of TBs when the treasury had planned to sell only K2, 400 million worth of TBs,” reads the report in part.

It is expected that TBs yield rates will continue to trend downwards during the next few auctions due to rising demand as more investors try to reallocate their money to TBs from other investment options.

In his ‘At the Market’ column published in The Business Times last week, financial market analyst Godfrey Jowah said with an expectation of interest rates to ease further, investors will continue to scramble for this paper so as to get the best yield for longer periods.

“However this will put even more pressure for the rates to drop. In the run up to year end the funds earmarked for treasury bills should wash out of the system and bring some stability to Treasury bill yields, perhaps with highest yields being more than 10 percent,” he said.

On forex reserves, Reserve Bank of Malawi indicates that there was a slight increase to 2.68 months of import cover on September 17 from 2.54 months on 9th September 2010.

This was attributed to an improvement when compared to a low of 2.4 months registered last month.

However MSB pointed out that the current level does not compare favourably with 3.12 months of import cover registered in September 2009; explanation was that the shortage was a result of logistical challenges and nothing to do with foreign exchange availability.

“Ironically, the low levels of foreign reserves is being experienced during the period the tobacco marketing season is still in progress and described as better than previous seasons,” MSB says.

The current tobacco market season has so far earned the country US$369.8 million reflecting a total of 186.5 million kilograms of tobacco sold at average price of US$1.98 per kilogram.

During a corresponding period of 2009, the green leaf had fetched US$362.1 million from196.4 million kilograms sold at an average price of US$1.84 per kilogram.

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