Over the past quarter several bond auctions were under-allotted as indicated by the table below. In particular the GC24, GC25 and GC27 saw relatively weak demand, representing N$93m of the N$174m shortfall.
We believe there to be a number of factors underlying this under allocation, both on the supply and demand side of the market. Historically, the Namibian bond market has been characterized by “too much money chasing too few assets” with minimal issuance by the Government and a growing investor base, however, since the introduction of an expansive-countercyclical budget in early 2011, major increases in debt issuance have been seen. During the 10 years from 2000 to 2010, a total net issuance of N$5.7 billion was seen, while in the subsequent three-and-a-half years, a further N$10.3 billion of net-issuance was seen. This major increase comes despite Government cutting back on net issuance in 2013, as it was relatively cash-flush, with sizable reserves held at the central bank, yielding little interest. This major increase in the supply of debt has also come about at a time when the Bank of Namibia and Ministry of Finance are attempting to extend debt duration, at the bottom of the interest rate hiking cycle. While this approach makes sense from the issuer’s point of view, for the investor, the bottom of the interest rate cycle is the least attractive time to take up fixed-income debt, particularly long duration. As such, a demand-supply mismatch has been seen, resulting in a widening of the Namibian spreads over their benchmarks. Going forward, we expect this mismatch to remain present, and expect to see further pressure on spread from interest rate increases. In short, we expect to see continued widening across the yield curve in the coming months.
Source: Bank of Namibia, IJG
The increase in supply has not been priced into the market with spreads contracting over the past 12 months. We suspect the market is only now feeling the increase in issuance and supply shortage or backlog of the past is being addressed, bringing demand and supply closer inline than was previously the case. This further substantiates our view on higher spreads going forward.
While a general widening on the spread is to be expected, a dramatic change was seen on the GC25, which weakened considerably, to 97bps from 69bps during the quarter. This spike in the spread took place at the 24 September auction where Heritage day in South Africa meant that several South African market players did not participate in the auction and thus demand was weak, resulting in aggressive bids by Namibian players and thus the widening of the spread.
Yield Curve Risk: The R186
The GC24, GC25 and GC27 are all benchmarked to the R186. Year to date N$1.23bn has been issued in these bonds, making up 49% of total issuance this year so far. When the GC25 was first issued it was among the market favourites, however we suspect that the market has become saturated over this point on the yield curve and yield curve risk is increasing. There are two scenarios that could play out regarding this section of the curve:
- The GC25’s spread narrows back to around 80bps and the market then just assumes that the spike was due to the auction being held on a South African public holiday which caused a slump in demand.
- The GC24’s and the GC27’s spreads widen in-line with the GC25’s move. We suspect that this is the more likely scenario due to other factors pointing to an increase in spreads.
Issuance over the next Six Months
Due to the shortfall the Bank of Namibia has decided to rollover the unallocated bonds over the upcoming auctions. It will increase monthly offerings on the GC17 and GC18 from N$40m and N$30m to N$50m respectively. The remaining balance of the shortfall will be issued over the next few months, in addition to the original borrowing schedule, as follows:
Expectations
Total Outstanding Debt
As of September 2014, total domestic debt stood at N$20.25 billion, of which 58% (N$11.8 billion) is in the form of GC’s, while the remaining 42% (N$8.45 billion) is in the form of TB’s.
