Marcella Scarlett, Business Reporter
The six-month Treasury bill yielded 8.13 per cent in August in a return to levels last seen three years ago.
Treasury rates have been trending upwards for months amid continued uncertainty over the economy, and notwithstanding a cut in the policy rate by the central bank in February.
Gregory Samuels, vice-president of treasury and trading at Scotia Investments Jamaica Limited, said the demand for higher yields can be traced back to the debt swap, which cut coupon rates and lengthened maturities on government bonds.
"Rates are definitely trending up. The main reason for that is the lack of liquidity in the market and this is coming from NDX (National Debt Exchange) because at the time, the monies that people were expecting to come into the market didn't, since the maturity was extended," said Samuels.
LACK OF LIQUIDITY
"Right now, there is a lack of liquidity and people are trying to stay short, so they look to the T-bill and are demanding a higher return for their money."
Mark Croskery, president and CEO of Stocks & Securities Limited, said the higher yield in the longer tenor T-bill is a signal of investors demanding a higher return from the "tie up" of their Jamaican-dollar holdings.
The six-month last rose above eight per cent yield in August 2010, when it performed at 8.24 per cent.
At the August 2013 auction, the yield for the one-month T-bill was 6.37 per cent, or three basis points higher than the yield in January; the three-month is at 7.34 per cent, up two basis points; while the six month, at 8.13 per cent, is 66 basis points above January's yield.
The change is even more stark fiscal year to date when the rates had fallen to a range of 5.63 per cent to 6.39 per cent. Yields on the one-month fell by 100 basis points; by 152bps on the three month and 190bps on the six-month treasury.
MAIN SHORT-TERM OPTION
Croskery said the main option for short-term investment in the market is the Bank of Jamaica (BOJ) 30-Day Certificate of Deposit, which pays a coupon rate of 5.75 per annum.
The other alternative is to buy US dollars, which Croskery said has been happening over the past few months. Forex demand has pushed the Jamaican dollar to a new low of J$102 to the US dollar.
The BOJ auctions treasuries monthly on behalf of the Government of Jamaica (GOJ). The yields form the basis on which GOJ and BOJ securities are priced.
"An important note is that although yields have been climbing it is on low subscription amounts in the auctions," Croskery said.
The maximum T-bill offer is J$400 million. The offers are usually oversubscribed except for the three month issued in June, when applications underperformed at J$284.3 million.
"They were trying to keep rates down, but they are going up. As to where interest rates will eventually end up, your guess is as good as mine," Samuels said.
Beyond NDX, the tight liquidity is also due to regular offer of variable rate special CDs priced against the T-bill rates and issued by BOJ to pull Jamaican dollars out of the system. The intent is to shift demand away from the foreign-exchange market.
The Jamaican dollar continues to depreciate.
HIGH RATES COULD HURT
Samuels says the central bank should be as focused on the performance of interest rates as stability in the forex market, as high interest rates could have serious implications for what is expected to be accomplished under the International Monetary Fund programme.
However, the analyst said: "I think a movement in the currency would have a greater impact on the overall debt than a movement in interest rate, so I think, for them, the movement in the interest rate is the lesser of two evils."
The special CDs range in tenure from six to 18 months, and the coupons are increasingly more attractive.
At the start of the fiscal year, the 180-day CD was offered at 5.97 per cent per annum; in August, the BOJ issued a 182-day CD at 7.49 per cent.
According to Samuels, these issues compete with the T-bill.
"For me, I think the role of the central bank is to manage the foreign-exchange rate and inflation. Right now, I think they are trying to protect the currency, so by mopping up liquidity, there is less money to chase the US dollar, so they can manage the foreign-exchange rate better," he said.
"But the flip side to that is that while they are doing that, the interest rate is going up. So they have to choose which is the lesser of the two evils."