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Humped curve looms as yields on 25-year bond forecast to fall

Humped curve looms as yields on 25-year bond forecast to fall

The yields for the 25-year Treasury bond that goes under the hammer today are projected to fall as the humped curve trend looms loudly.

The central bank wants to raise 133bn/- paid in the next 25 years at 15.95 per cent, however, the bond is subjected to clean and dirt prices since it was launched in April last year.

The clean price is the price of a coupon bond not including any accrued interest while dirty price is when a bond price includes interest that has accrued since the latest coupon payment.

Debt Market Analyst Imani Muhingo said the market expects a significant oversubscription similar to previous long-term auctions.

“The appetite for these papers is still high, as the yields are still higher compared to other East African markets.

“The prices are also expected to skyrocket, considering it goes by a dirty price since it’s a reopening of a 25years bond issued in April 2021,” Mr Muhingo said.

Vertex Securities said in its weekly market review yesterday that the bond yields are expected to go down amid high oversubscription.

“We expect yields to decrease in the [today’s] auction for a 25–year bond with subscriptions reaching high levels,” Vertex said.

The bond price, BoT said, will include the accrued interest of 3/9766 per 100/-, meaning that based on the yield to maturity of 16.3381 per cent, the clean price is 97/6771 while the dirty price is 101/6537.

Zan Securities projected in their weekly market wrap-ups further decline in yields for the long end of the curve as investors continue to prefer high coupons being offered by long-dated papers.

“As yields on the long end of the yield curve continue to fall, we are likely going to see a humped yield curve, which is uncommon…,” Zan said.

The humped curve may form as the result of a negative butterfly, or a non-parallel shift in the yield curve where long and short-term yields fall more than an intermediate one.

“We have already seen a sharp fall in a 20-year paper yields currently trading at 13.8per cent, just 30 basis points above the 15-year Treasury bond coupon,” Zan said in the report yesterday.

The stock brokerage firm further said activities in the secondary market were vibrant last week as market activities continue to resume off the holiday season.

The value of bonds traded increased by 240 per cent to 62.66bn/- from 18.41bn/- recorded last week.

“The increase in trading mirrored our projection last week as we anticipated trading activities to slightly increase mid-way through January,” Zan report said:

“We expect activities in the secondary bond market to cool off owing to primary bond issuance as the central bank sets to auction a 25-year Treasury bond [today]”

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