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Market capitulates on rates - Benchmark T-bill yields 12.5%

Published:Wednesday | February 3, 2010 | 12:00 AM

File - Myrtle Halsall, Deputy Governor of the Bank of Jamaica.

In what appears to be a capitulation to Government's push to lower rates in line with the Jamaica Debt Exchange (JDX) offer, the monthly treasury bill auction yielded 12.5 per cent on the benchmark six-month bill and 11.68 per cent on the three-month issue.

It pushes rates back to 2007 levels when the Bruce Golding administration took office, but traders were mixed in their reactions on why investors, even before the extended JDX offer closed and the trades settled, had taken a 4.3 point cut on treasuries that one month ago yielded up to 16.8 per cent.

"The market is reacting favourably to the JDX which has been a success so far," said one analyst who did not wish for his name to be published.

"It definitely shows acceptance of where rates are going which will even be heading lower after February 16," he said.

Banker Hugh Miller also said the results indicated that the market had truly embraced the objectives of the JDX.

"The market is adjusting to the new benchmark instruments which will come into issue within the next two weeks - under the JDX on February 16," said Miller, vice president of treasury at Scotiabank Jamaica.

"So in other words, the auction results signal that the market has agreed to embrace the new instruments and so bidders have decided to reprice their investment books," he said.

Mark Croskery of Stocks and Securities offered a similar assesmment, saying the market was willing to ride the downward trajectory, though concerns remained about the yield curve.

The Bank of Jamaica meanwhile is pushing back on any suggestion of involvement in the January 27 auction, saying the market whispers were totally unfounded.

"Absolutely not; the Bank of Jamaica did not intervene," said Myrtle Halsall, deputy governor responsible for research & economic programming and banking & market operations. "We don't buy treasury bills and the only way it would be on our balance sheet is if we buy from an institution to provide liquidity," she said.

The central bank since last December has been propping up the Government through purchases of its securities. A $13 billion intervention in late January brings total assistance to about $36 billion, a small portion of which has been repaid.

The central bank says its involvement in the auction was only as agent for the issue.

"It's strictly the market and in fact the auction is done through an electronic gateway where players submit bids and at close, run the numbers," Halsall said.

Both bills, with nominal value of $400 million each, were oversubscribed - moreso the three-month for which applications topped$619 million, while the six-month had applications totally $412.8 million.

But, their successful takeup, notwithstanding, at least one analyst polled by Wednesday Business is questioning the way in which the auction was managed.

"With it being barely over-subscribed, I am surprised it should be at that level," he said of the six-month issue.

"I would have to get more information on who the bidders might be," he said.

Early last month the Government of Jamaica floated a special two-month treasury bond priced at a fixed 12 per cent in a test of the market, in line with the goals of the JDX, whose combined offers average 12.25 per cent.

The market, however, was not excited by the 'treasury bond', which had minimal take-up.

The JDX launched on January 18 offered to government bondholders 24 new fixed, variable and CPI-indexed bonds to replace some 350 old bonds held by both institutional and individual investors valued at over $700 billion.

The offer closes today, February 3, with final settlement date set for February 16, but take up has already topped the 90 per cent target for the issue to be successful.

Teasury bills, of which the total outstanding at the end of January stood at $3.8 billion, were excluded from the JDX transaction.

Already too, the central bank has removed its open market tenors with maturity over 30-days. Its 30-day tenor is currently priced at 12.50 per cent.

The T-bill rates are normally used in the pricing of coupon payments on GOJ variable variable rate instruments.

The next treasury auction is set for Wednesday February 24.