CHART OF THE WEEK
In recent months, Namibian Treasury bill (T-bill) and average Negotiable Certificate of Deposit (NCD) rates have been on a steady decline, with a significant drop observed following the Bank of Namibia’s decision to cut the benchmark interest rate from 7.75% to 7.50%.
Prior to the rate cut, the market had been increasingly pricing the probability of lower administered rates leading to bidding at lower yields in primary auctions. The yield compression was also largely driven by excess liquidity within the market with limited net issuance from the government – and less attractive NCD rates, given the banking sector’s elevated capital position.
In anticipation of the beginning of the rate-cutting cycle, investors sought longer-duration T-bills in a bid to lock in higher rates for longer, which resulted in a small inversion in Namibia’s yield curve (shorter-duration yields, higher than longer-dated T-bills yields) due to the rollover risk associated with the shorter-dated instruments.
When the Bank of Namibia announced the 25 basis points (bps) rate cut, T-Bills yields contracted by nearly the same rate. The Namibian T-Bill yield curve contracted by an average of 19bps, led by 18bps contraction on the 12-month paper. In August, yields have compressed by 32bps, which is more than the cumulative yield compression recorded over the previous three months. The rate cut by the central bank effectively accelerated the downward trend that was already in place, causing a swift adjustment in the market.
With this recent movement, it seems that the current trend of decreasing yields may continue. The pattern of declining yields, accelerated by the recent policy decision, suggests that future Treasury Bill auctions might reflect further decreases, aligning with the ongoing adjustments in the financial landscape.
Moreover, as a result of this shift, commercial banks are expected to follow, adjusting their own interest rates on products such as call accounts and fixed deposits. This effect highlights the widespread impact of the Bank of Namibia’s rate cut, influencing not only government securities, but also the rates offered by financial institutions to their customers.
Prior to the rate cut, the market had been increasingly pricing the probability of lower administered rates leading to bidding at lower yields in primary auctions. The yield compression was also largely driven by excess liquidity within the market with limited net issuance from the government – and less attractive NCD rates, given the banking sector’s elevated capital position.
In anticipation of the beginning of the rate-cutting cycle, investors sought longer-duration T-bills in a bid to lock in higher rates for longer, which resulted in a small inversion in Namibia’s yield curve (shorter-duration yields, higher than longer-dated T-bills yields) due to the rollover risk associated with the shorter-dated instruments.
When the Bank of Namibia announced the 25 basis points (bps) rate cut, T-Bills yields contracted by nearly the same rate. The Namibian T-Bill yield curve contracted by an average of 19bps, led by 18bps contraction on the 12-month paper. In August, yields have compressed by 32bps, which is more than the cumulative yield compression recorded over the previous three months. The rate cut by the central bank effectively accelerated the downward trend that was already in place, causing a swift adjustment in the market.
With this recent movement, it seems that the current trend of decreasing yields may continue. The pattern of declining yields, accelerated by the recent policy decision, suggests that future Treasury Bill auctions might reflect further decreases, aligning with the ongoing adjustments in the financial landscape.
Moreover, as a result of this shift, commercial banks are expected to follow, adjusting their own interest rates on products such as call accounts and fixed deposits. This effect highlights the widespread impact of the Bank of Namibia’s rate cut, influencing not only government securities, but also the rates offered by financial institutions to their customers.
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