The Ghana Fixed Income Market has intimated that after comparing various securities in the money market to close the year 2020, longer term bonds had higher yields than short-term ones, depicting a normal yield curve, and pointing to signs of an economic expansion despite the global crises that has greatly affected the Ghanaian economy.
The yield curve reported by the Ghana Fixed Income Market compared the three-month, six-month, 364-day, two-year, three-year, five-year,6-year, 7-year, 10-year, 15-year and 20-year government securities, which was upward sloping.
A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time or the time value of money.
However, in December, bonds showed some warning signs of recession when yields on the 3-year bond and the 5-year bond i.e., 17.88 percent and 18.3 percent respectively, fell marginally below the two-year bond’s rate of 18.69 percent as well as the 7-year bond’s yield of 18.46 percent fell below the 6-year bond’s yield of 19.48 percent. Although this is rare, because Investors usually demand more in interest for tying up their money in longer-term debt, its quite expected as a result of the current economic hardships wrought by the coronavirus pandemic.
Even though the temporary flip in yields sent some worrying signals to investors, analysts cautioned investors not to make too much a big deal of it because more attention is centered on the relationship between three-month yields and 10-year yields.
Moreover, some investors believe an inverted yield curve is just a reflection of market worries that the economy is weakening and that the Bank of Ghana needs to cut short-term interest rates.
Other investors are of the view that when yields of long-term securities start slipping below short-term ones, it can make lending less profitable for banks and in the long run it will affect businesses, cutting off growth opportunities for companies.
Analysts further indicate that though inverted yield curves have historically been reliable, it is not a perfect predictor of recession.
When investors expect longer-maturity bond yields to become even higher in the future, many would temporarily pack their funds in shorter-term securities in hopes of purchasing longer-term bonds later for higher yields.
For instance, all treasury auctions undertaken this year have seen investors oversubscribing with the latest being over 30 percent. More so, investors are seen patronizing more of the 91-Day Treasury bills.
In a rising interest rate environment like Ghana, analyst intimate that it is risky to have investments tied up in longer-term bonds when their value has yet to decline as a result of higher yields over time. The increasing temporary demand for shorter-term securities pushes their yields even lower, setting in motion a steeper up-sloped normal yield curve.
Overall, though some long-term securities were sinking low along the yield curve, it remains above short-term yields, specifically treasuries maturing in less than year, which means not all of the yield curve is inverted offering a bit of solace to investors not to panic. The 20-year yield sat at 21.48 percent above the 19.82 percent 10-year yield and the 18.69 percent two-year yield.
Some analysts also say the yield curve may be less reliable an indicator this time because of technical factors that are distorting yields.
In conclusion, for this reason investors must not dismiss the current behavior in the fixed income market as they’ve entered the new year in an ebullient mode, though the economy is faced with many challenges including inflationary pressures and fears for the stability of the currency.
