High-interest rates (yields) on the 91-day, 182-day and 364-day Treasury Bills are expected to taper (reduce) as they mimic the Central Bank’s easing policy rate underpinned by the falling headline inflation rate.
Interest rates on Government’s short-term debt instruments are greatly influenced by adjustments in the Bank of Ghana’s bi-monthly policy rates.
The Bank of Ghana’s prime rate/policy rate as recently announced by the Bank of Ghana inched up to 30% on the back of a marginal increment in headline inflation.
The Central Bank’s monetary policy easing cycle is set to commence in the fourth quarter of 2023 with the policy rate being projected to reduce to 28% at end-2023, further declining to 22% at end-2024 given a return to the path of disinflation by the country’s headline inflation rate.
Given the significant influence of policy rate on yields/interest rate of Government securities particularly Treasury Bills, yields on Treasury Bills is expected to taper over the next 18 months – one and half year – from now through to the first quarter of 2025.
Yields on the 91-day, 182-day and 364-day are projected to end Q1 2025 approximately at 15%, 17% and 20% respectively.
Interest rates/yields on the 91-day, 182-day and 364-day T-Bills as of August 7, 2023, were 25.5%, 27.2% and 30.4% respectively.
Meanwhile, from now to the first quarter of 2025, investors that are income-oriented with short-term income investment objectives are expected to continue to benefit from the high yields on Treasury Bills.
Currently, the high-interest rates or yields offered by Government on Treasury Bills is to make them attractive enough for investors to want to tie up or put their monies into the short-term debt instruments which now serve as the Government’s sole major source of financing aside tax revenues and grants.
Additionally, the high-interest rates or yields offered on T-Bills are to help Government narrow the negative returns gap on investments in treasury bills given the prevailing high inflation rate. However, within the second quarter of 2025 when inflation has tapered back to the Central Bank’s medium-term target band, returns on investments in Treasury Bills are expected to turn positive.
Inflation per projections by the Bank of Ghana and the World Bank is expected to taper (reduce) to the Central Bank’s medium-term target of 8+-10 in the second quarter of 2025.
The return to the Central Bank’s medium-term target band is due to the anticipation that headline inflation will resume its disinflationary path.
Inflation which currently stands at 42.5% (at end-June 2023) is projected by Government to fall to 31.3% by the end of this year – 2023. This is, however, still some 21.3 percentage points (21.3%) above the upper band of the BoG’s medium-term target.
In 2024, inflation is projected by the IMF to average 22.2% but end the year at 15%; average 11.5% but end 2025 at 8%.
A myriad of factors are expected to keep the inflation rate elevated till Q2 2025 when inflation is projected to taper back into the medium target band.
Factors anticipated to keep inflation elevated include high food inflation driven by high fertilizer prices and inadequate local food production necessitating food imports, increased port tariffs and taxes, scheduled periodic upward review of utility tariffs which is a requirement for the implementation of the IMF programme and fuel price increment.
In the scenario where there is a delay of the disbursement of the $350m fifth tranche in May 2025 under the IMF programme as a result of Government failing to meet set targets for the $350m disbursement due to overspending during the 2024 elections – which is usually the case in election years – this is expected to lead to some level of depreciation in the cedi, adding to the inflationary pressures and contributing to an uptick in the country’s inflation rate.
The final tranche disbursement of $400m under the IMF programme is scheduled to be in May 2026.
However, the high-interest rates/yields on T-Bills, are anticipated to increase the interest burden on Government and may possibly force the Government to consider the possibility of re-structuring T-Bills to reduce its interest cost burden and sustain gains made from the DDEP as already noted by some analysts in the country. Hence, on a cautionary note, investors are to be mindful of the rate and extent at which they invest or tie up their money in Government T-Bills.
Yield Curve to keep being inverted over the medium term
The country’s yield curve is expected to remain inverted (negative sloping) in the medium term as yields on long-term debts, due to the offering of new notes and bonds by the Government under the domestic debt restructuring programme (DDEP) are less than yields on short term debt instruments like treasury bills.
The yield on the country’s 10-year note which is an indication of investor sentiments about the direction of the economy in the medium term is currently lower and further expected to remain lower than yields on T-Bills in the medium term.
The yield on the country’s new 10-year note is currently 12.8% with a coupon rate of 9.4%.
Government new bonds with 11, 12, 13 and 14-year maturity periods all have yields around 13% with coupon rates ranging from 9.5% to 10%.
The low yields on the 10-year note and other longer-term debt instruments (bonds) compared to shorter-term debt instruments are indicative of the bearish and pessimistic sentiments of investors about the future of Ghana’s economy.
Yields on the new longer term debts are expected to remain below that of shorter term debts on the back of less trading activity in the new notes and bonds market primarily due to the flow of investor funds to the shorter term debt instruments that have higher yields.
Additionally, the cautious approach to trading in the new long-term bonds by investors over the commencement and ongoing second phase of the domestic debt restructuring programme, the conclusion of negotiations with creditors on an agreed external re-structuring programme set to happen in 2024, and the uncertainty of Government being able to diligently implement the IMF programme to attain the set debt sustainability target of 55% by 2028, is also expected to influence yields on the new notes and bonds.