The Treasury Bills (T-bills) market seems to be fast losing its allure of some few months ago as fiscal authorities’ stance to check on borrowing has pushed yields to levels below the inflation rate.
If money market traders were time travelers and returned to February and March last year, they would see that the average yield on all the three tenors was above 40 percent.
It got better because the inflation rate at that time was around 36 percent, meaning that the margins were way above the inflation rate.
But fast forward to March this year, traders are recording negative returns as below inflation yields bite deep into the little mark-ups they get out of a stingy Treasury.
On Tuesday last week, the 91-day tenor dropped to 11.75 percent from 13.67 percent, 182 days yield was at 12.42 percent from 14.06 percent and the 364-tenor slightly increased to 18.50 percent from 18.48 percent, according to the Reserve Bank of Malawi (RBM) data.
In February alone, according to Nico Asset Managers, the T-bills yield decreased on all the tenors with the 91-days average yield decreasing to 17.66 percent from 27.46 percent, the 182-days average yield easing to 18.93 percent from 29.29 percent while the 364 days average yield dropping to 21.43 percent from 30.41 percent the months before.
The all type yield decreased to 19.34 percent from 29.05 percent, based on the calculations by the investment advisory firm.
Analysts are seeing the current trend as two sides of the same coin.
“This does affect the propensity for investors to save and place their savings in the money market. However, from another perspective, declining interest rates force financial institutions to hunt for credible or bankable clients to whom they can lend,” explained a Blantyre-based investment analyst. He observed that because of competition, clients tend to get better deals on interest rates on borrowed funds, assuming that most of such clients would be productive entities.
But the analyst said the lower yields on government securities signal some discipline on the part of government in controlling its appetite for debt which shows political will to effectively manage monetary policy by effecting controls on the fiscal side.
With the low yields in T-bills and its subsequent inflation-ravaged negative returns, the money market could become unattractive, thereby compelling investors to look for alternative investment avenues such as property and stock markets.
This is on the premise that the money market can only be attractive when it gives above inflation returns to avoid capital erosion by rising prices, while maintaining its attraction.
There is, therefore, supposed to be a shift of attention by investors to the directly competing investment avenues such as the Malawi Stock Exchange (MSE).
Market analyst Nelson Mkwende, who is also manager at FDH Stockbrokers, earlier said fundamentals and expectations will guide one to say that there should have been lots of investors flocking to the stock market at this time as the interest rates are going down.
“The stock market has, however, not registered that significant activity during the months of January and February 2014 when we compare to the corresponding period last year, much as it still stands to be a sellers’ market on most counters,” he said.
He said if the rates keep trending downward as it promises to be, that will be an advantage to the stock market.
But other analysts have noted that despite the decline in money market rates, there is no guarantee of a reciprocal increase in the local bourse’ performance due to the effect of the property market and other investments not listed on the shares market.