Mr. Isaac Kwasi Mensah, a Financial Analyst and Portfolio Manager at SIC Financial Services Limited, has stated that the recent major cut in Treasury bills rates will have an impact on the Ghana Stock Exchange (GSE).
Mr Kwasi Mensah while reacting to the development in an interview with the Vaultz News, noted that Treasury yields and the stock market move in opposite directions because they are competing for capital.
“The decline in Treasury yields will have a rippling effect on the stock market. This is because interest rates are the most significant factor in determining Treasury yields, and they play an influential role in the stock market. Since bonds and stocks tend to move in opposite directions, a decline in Treasury yields will push investors to the stock market.
“Stock market rallies tend to raise yields as money moves from the relative safety securities market to stocks. When optimism about the economy increases, investors transfer funds into the stock market because it benefits more from economic growth.”
Mr. Isaac Kwasi Mensah
The analyst noted that with inflation still on the roof and with yields declining, it doesn’t make sense to still stick with bonds and Treasuries because one of the best ways to beat inflation is to dispose off bonds and buy stocks in inflationary pressure.
“Lower interest rates and lower bond values put upward pressure on stock prices. Bond buyers receive a lower interest rate and less return on their investments, which forces them to consider buying higher-risk stocks to get a better return.
“That means as yields go down, the equity markets tend to outperform by a bigger margin and as bond yields go up equity markets tend to falter. This relationship may not exactly hold in the very short run. But if you consider it over a period, this relationship will be clearly visible.”
Mr. Isaac Kwasi Mensah
Reasons for the Decline in Yields
The reason for the decline in interest rates, leading to decline in yields, the analyst explained that central banks are committed to low-interest rates to stimulate the economy during recessions. He added that the Bank of Ghana needed to reduce the yields so as to reduce the debt stock and stimulate the economy.
“This lasts until the economy begins to grow without the aid of monetary policy or capacity utilization reaches maximum levels where inflation becomes a threat. Bond prices and stock prices both move up in response to the combination of mild economic growth and low-interest rates.”
Mr. Isaac Kwasi Mensah
Overall, Mr Kwasi Mensah noted that trend toward lower interest rates and bond yields is often credited with supporting higher prices in the stock market.
However, the analyst lauded the government for taking such a courageous step to lower the interest rates on its securities given inflation is still at record high. He explained that total interest servicing costs for short-term instruments are expected to drop significantly as the government corrects yields on the money market.
Mr Isaac Kwasi Mensah forecast that the government will continue to push the rates down as it has started. “This will keep the real interest rates in the negative and investors will also continue to make informed decisions by moving to other markets such as the stocks and forex”.
Last week, the government in a bid to correct interest rate anomalies, pushed the yields significantly lower from the 35 percent levels.
Yields on the 91-day bill ticked lower by more than 1,000 basis points to 24.1%. According to the auction results by the Bank of Ghana. The 182-day fell by 850 bps to 26.5%, while the 1-year note was down 750 bps at 27.5%.
The latest drop of between 7.5% and 10%+ marks the biggest fall in a single auction in many years.
Meanwhile, the government rejected all bids quoted around 35% levels in the T-bills auction last Friday and asked investors to revise down.
