Government of Jamaica, dealers at odds - Benchmark T-bill auction suspended
published:
Friday | February 22, 2008
Sabrina N. Gordon, Business Reporter
Left: Anya Schnoor, president of the Jamaica Securities Dealers Association. - File
Right: Senator Don Wehby, minister without portfolio in the finance ministry. - File
A decision by Government not to issue the monthly six-month Treasury bill, used as an index for repricing of variable rate debt issues, has created some nervousness among brokers in the market who had anticipated higher yields from the auction in February and, therefore, bigger returns at the next round of coupon payments on government paper.
Big monies are at stake.
Coupon payments become due on some $54 billion of variable rate government issued debt - including $32.7 billion of investment bonds between February 27 and March 20, and $21 billion of variable rate local registered stock.
What is not immediately available was information on how much of the coupon payments were to be priced against the six-month bill versus the three-month issue.
"While a move not to issue a 6-month T-bill for February will reflect a positive for government fiscal figures, it sends a worrying signal to the market and investors," said one broker commenting on condition of anonymity.
Rezworth Burchenson, managing director of Prime Asset Management Limited, a pension fund manager, said the decision could erode client confidence in his sector, which at last estimate manages some $132 billion of private pension funds.
"Members of pension plans already have some mistrust of pensions and the new regulatory environment. A decision
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like this will negatively impact on pension fund returns, to the extent that your plan held bonds set to reprice upwards," said Burchenson.
"This will contribute towards further aversion of pension funds."
The expectations of higher yields on the benchmark T-bills are based on the combined 2.5 point hike in signal rates by the central bank.
But by holding back on the auction, the government would be able to make interest payments at 13.34 per cent plus the reset rate, rather than the higher yield that is anticipated from the February 27 issue.
In fact dealers had expected the T-bill results to track the new open market rates set by the Bank of Jamaica, which was raised by 120 basis points to 14.2 per cent on the 6-month tenor.
The BoJ's full suite of debt instruments is now priced within a range of 13.5 per cent to 15 per cent.
"Pension fund returns also stand to be impacted negatively to the extent that one plan hold bonds set to reprice upwards contributing to further aversion towards pension funds if the 6-month T-bill is not issued," said Burchenson, a pension fund manager.
Less tense
The Jamaica Securities Dealers Association (JSDA) has met with Senator Don Wehby of the Ministry of Finance for assurances, emerging from those talks a lot less tense than when they went in.
"We have discussed the matter with Minister Wehby and he said that he will have dialogue with the Debt Management Unit within the Ministry and get back to the association," said JSDA president Anya Schnoor.
Wehby at different times was said to be locked in meetings and did not respond to requests for comment, but a Finance Ministry response to Financial Gleaner queries issued through its communications unit said at no time had Government given an undertaking to dealers to issue a 6-month bill every month.
The ministry said its actions were dictated by a need to reduce debt financing charges in the current quarter, and that it had structured its new debt issues to meet its requirements taking into consideration recent developments in the market, particularly the change in rates by the BOJ.
But dealers say they had been given assurance of timely T-bill issues - sources say the undertaking was given following the near 14-point hike in rates by the BOJ in 2003 — and now look to the 6-month yield as the benchmark rate, especially with the redistribution of the domestic debt now more heavily skewed to variable rate or VR instruments.
"We buy the instruments with a clear understanding that repricing would take place at current market rate," said Schnoor.
At December 31, 2007, the domestic debt composition was $346.6 billion VR instruments and $211.5 billion fixed rate.
Consequently, dealers say they have come to rely on the T-bill issue, and that if the Government were to stick to its decision, it would likely erode confidence in the administration.
The last 6-month issue was on January 25 with average yield of 13.34 per cent. Following this issue, however, the Bank of Jamaica on February 4, raised interest rates for a second time in a four week period.
Auctioneer Bank of Jamaica has advised that a 90-day bill will be auctioned next week.
The finance ministry has given no clear indication on a 6-month bill, saying discussions are ongoing, but noted that circumstances will likely permit the issue before fiscal year end March 31.
The Ministry's debt schedule includes a new VR bond to be placed on the market between February 27 and 29.
