Why treasury bill yields are falling

At the start of October, the interest rate on the 91-day treasury bill was 22.8699% and the rate for the 182-day bill was 24.691%. At the time of writing this post the rates were 16.6759% and 17.9365% respectively.

I have already written about the fall in treasury bill interest rates and how that is good for stocks. However, from questions I have been asked, it appears I failed to give reasons why the fall was happening. I will attempt to do that in this post.

  1. Increased demand for treasury bills ahead of election. I dug up the summaries of the past few government of Ghana treasury bill auctions to understand what had happened in terms of the demand for treasury bills and the amount supplied by government. I summarize the results in the chart below.The orange line shows how much in bids were tendered and the green line shows how much was accepted by the government. We see a hike in bids tendered from November 11  which peaks on November 25. This increase in demand could have been caused by businesses and individuals seeking a safe haven for their money ahead of election uncertainty.
  2.  Reduced supply of treasury bills due to issue of longer-dated instruments. As you would have noticed from the above chart, the difference between the bids tendered and those accepted significantly widened between October 28 and December 1. This can be explained by the issue of a GH¢230m 1-year note on November 4, a GH¢312m 2-year note on November 11 and a GH¢438.04m 10-year bond on the same date. These long-dated instruments ensured that the increased demand for short-term t-bills was met with a reduced supply of them and thus the government could pay lower interest rates for them.
  3.  Fall in inflation rate and inflation expectations As shown in the chart above, inflation has trended downwards this year. The lower the inflation rate, the lower the interest rate that investors will accept on government debt. Also the expectations that people have for future inflation seems to be subdued. This is because the government was able to issue the GH¢438.04m 10-year bond at an interest rate of 19%. As investors expect the interest rate to be more than inflation, this means that investors expect the inflation rate not to be more than 19% for the next ten years. With these expectations of stability going forward, it’s no surprise that government is able to borrow at a cheaper rate.
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Jerome Kuseh

Financial Analyst | Accountant | Private Investor
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