Offshore investors have displayed an improving appetite for local currency (LCY) bonds on the secondary market in recent weeks, according to GCB Capital, an investment advisory firm.
In its February report, GCB Capital cautiously stated that this emerging offshore investor appetite may be a speculative strategy of buying the dip, given the depressed prices, in anticipation of price recovery as the macroeconomic outlook steadily improves.
“We have noted in recent weeks improving offshore appetite for positions in LCY bonds on the secondary market. This emerging offshore investor appetite may be a speculative strategy of buying the dip,” GCB Capital said.
Until recently, activity on the secondary bond market has been dominated by sell-buybacks and repo transactions, accounting for about 80% of market activity, with limited pure trades among investors, undermining effective price discovery.
Secondary market activity picking up
Trading activity in the LCY bonds is steadily improving, with investors turning over, on average, GH¢1.22 billion weekly, up from the largely dormant post-DDEP market. The market turned over an aggregate volume of GHC22.82billion over the first two month of 2024, dominated by T-bills which accounted for almost 70% of the total volume traded.
“Two coupon payments without distress could trigger some write-backs of the sizeable impairments booked in 2022 and slowly improve valuations,” GCB Capital noted.
The Treasury completed the second cash and in-kind coupon payments on the DDEP bonds on February 20, 2024, paying the GH¢5.85billion cash coupon due investors without distress. The payment completes the first year of debt service since the DDEP closed in February 2023, setting the tone for investors to re-assess their accounting treatment of the bonds.
Risks remain, but valuations expected to improve
“While default risks remain pronounced amid the substantial refinancing risk in 2027 and 2028 and the sizeable single-day coupon obligations to come, we envisage a write-back of significant portions of these bonds in 2024, which should steadily improve valuations and stimulate activity on the secondary fixed-income market,” GCB Capital stated.
While uncertainties remain, GCB Capital believes the scope of the fiscal, debt and macroeconomic deterioration requires stricter fiscal discipline and expects the IMF backstop to provide ample restraint to build on the macro gains chalked thus far.
“Following the latest coupon payment and anticipated improvement in bond valuations, buying the dip could ultimately benefit fixed-income investors with a medium-to-long-term horizon,” the firm advised.
The market expects the February 2024 end-of-month portfolio adjustment by pension fund managers to augur favourably for bond exchange.
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