T-bill yields on the rise, as BOJ cuts signal rate
For most of 2018, the market was willing to follow the signals set by the Bank of Jamaica, BOJ, whose policy decisions has been to cut interest rates.
The monthly Treasury bill auctions held by the central bank on behalf of the Government of Jamaica, started out at or above four per cent at the top of the year, but fell monthly in harmony with BOJ's policy signals - that is, until September, when the first signs that the market may be moving in a different direction began to show up in the auction results. T-bill yields are computed based on bids submitted to the central bank.
The August auction yielded 1.693 per cent on the three-month T-bill, which turned out to be the floor for the market. The next month, the average yield on the same bill was 1.709 per cent, and since then it has spiked monthly to reach 2.047 per cent in December.
The six-month T-bill has taken a similar path, although its floor came a month later in September at 1.869 per cent. The yield in December was 2.066 per cent.
Within that time frame, the BOJ had cut and was maintaining its policy rate at 2.00 per cent. The policy rate is the equivalent to the overnight rate charged to banks to park money at the central bank.
Cutting interest rates is meant to reduce the cost of borrowing, and the cost of capital. For investors, it may also mean lower returns on some investments, but a driver of the equities market.
However, even as T-bills have changed trajectory, the central bank remains wedded to its 'accommodative' policy position, so in December, even while Treasury yields had ticked back above two per cent for the first time in six months, the BOJ's rate decision was a 25 per cent reduction in the overnight rate to 1.75 per cent. The T-bill auction was held on December 12 and settled on December 14, and the rate decision was made a week later, on December 20.
BOJ says the auction results don't drive its rate decisions.
"The bank's policy decisions are not determined by the trend in Treasury bill yields, but on the bank's outlook for inflation relative to its inflation target," BOJ Senior Deputy Governor John Robinson told the Financial Gleaner.
The rate cut on December 20 was based on the central bank's assessment that inflation was in danger of falling below the lower limit of its 4.0 per cent to 6.0 per cent target range in the latter half of 2019 and early 2020.
Robinson also said the performance of the treasuries over the past four months was also affected by the central bank's monetary stance and a contraction in market liquidity. For this year, each T-bill auctioned has either offered $600 million or $700 million for market subscription.
"The signal rate is lower than the bank's inflation target and therefore considered to be accommodative," Robinson said. "The signal rate influences other rates in the money market, including those on treasury bills. Treasury bill rates are therefore converging with Bank of Jamaica's signal rate as institutions seek higher yields in alternative investment instruments," he said.
The senior deputy governor said that although liquidity is still high, it has been declining.
The fall in liquidity, as evidenced by lower overnight placements by banks at the BOJ towards the latter part of 2018, he said, was associated with the central bank's sale of US dollars to the market during the months of August to October, continued buoyancy in revenue intake by the Government, and the demand by financial institutions for currency for use during the Christmas season.
The central banker also noted that the marginally higher yields on Treasury bills should not be seen as signalling the beginning of a trend.
"The ebb and flow of the factors that affect liquidity in the market will continue to affect short-term rates, but the long-term direction of money market rates is guided by the central bank, through its monetary policy decisions," said Robinson. "Money market rates are consistent with the bank's monetary policy signals," he said.