Why the yield on 2-yr Note jumped to 19.5% this week

Ghanaian treasury yields recorded a mixed performance this week. The yield on the 2-year note hardened by 150bps to 19.50% this week as investors continue to seek higher yields to cushion returns against higher inflation expectations emanating from GHS depreciation and higher transportation fares arising from upward pump fuel price review. Inflation moved up by 30bps to 9.9% in August, but the authorities held the benchmark policy rate at 17.0% for the second consecutive time while hoping to implement measures to curb inflationary pressures. However, the yield on the 91-day TB remained unchanged at 13.41% while that of the 182-day TB softened by 6bps to 14.27% this week versus 14.33% last week. See the current yield curve of the Ghanaian economy in figure 1 below.

There was strong demand for the high-yielding 2-year note that helped the government to raise a total of GHS973.27mn, which was above the government’s target of GHS834.00mn for the week. In light of higher inflation expectations, the yield curve is likely to continue to rise in the coming weeks in order to boost demand for treasury securities, otherwise investors are likely to continue to put their funds into risky high-yielding fixed deposit products. In addition, some of the investors may find it more interesting to play in the secondary market where they could still purchase high-yielding bonds that were issued a few years back. See market activity charts for this week below.

Overall government borrowing from the domestic market has slowed in 2018 as government aims to reduce the fiscal deficit from an estimated 6% in 2017 to 4.5% in 2018, buoyed the introduction of new tax measures in the mid-year budget to boost revenue generation, implementation of smart ideas that would result in off balance sheet spending and cut in expenditure in the worst case scenario. See market activity charts for year-to-date below.

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