Govt 2.5% 2023 bond underwhelms
This week, we at Bourse will be discussing the implications of the recent Government of Trinidad and Tobago fixed rate bond issue. We will then highlight our outlook for the fixed income market and the opportunities available through Bourse. It is clear that better opportunities exist in the US dollar fixed income investment space.
Fixed Income Yields
Local Bond Issues & Interest Rates
During May 2013, the Govt auctioned a TT$1 billion, 7-year bond due to mature in 2020 with a fixed coupon rate of 2.60 per cent. A relative scarcity of fixed income investments, combined with excess liquidity resulted in the issue being oversubscribed with total bids of TT$2.75 billion. The bond was allotted at a premium, priced at $104.23 per $100.00 face value and a corresponding yield to maturity of 1.95 per cent.
This was not the case for the latest $1 billion Govt issue. The latest bond issued on August 6, 2013, due to mature in 2023 with a fixed coupon of 2.50 per cent was under-subscribed, with total bids amounting to TT$895 million. More significantly, the total bids allotted were TT$559 million. The under-subscription resulted in the bond being allotted at par value of TT$100.00 and yield of 2.5 per cent. Unsuccessful competitive bids totalling TT$336 million were placed at a price lower than the clearing price of $100.00. In other words, investors were seeking yield higher than the 2.5 per cent offered. Full details of the bond issue are shown in Exhibit 1.
The under-subscription may be attributable to two factors. Firstly, the head-turning, talk-of-the-town investment has undoubtedly been the First Citizens Bank initial public offering. The buzz and investor excitement created by the FCB IPO has diverted attention from most other investment opportunities. Indeed, at a TT$22 issue price and projected dividend yield of 4.80 per cent, institutional and individual investors alike have been scrambling to subscribe for as many shares as they can afford. Consequently, a substantial level of liquidity will be committed to this IPO, which is carded to launch at the end of August.
The second factor, however, was purely investor yield demands. With approximately 37.5 per cent of the total bids ($336m of $895m) coming in at prices below $100, it would seem that 2.50 per cent for a 10-year investment is unattractive to some in the investment community.
The under-subscription of the Govt 2023 bond issue can also be illustrated in the resulting upward shift of the Bourse TTD Yield Curve shifting upwards in July (Exhibit 2).
With excess liquidity still high, local Treasury bill (T-Bill) yields remain depressed. The latest data from the Central Bank indicates that 91-day T-Bill yields for July dipped to 0.14 per cent from 0.15 per cent in June, whereas the 180-day T-Bill yield increased to 0.21 per cent in July from 0.18 per cent in June. As short-term yields remain relatively unchanged between June and July, medium to long-term yields show increasing divergence.
Global financial market expectations of interest rate increases over the short-medium term have been growing, following statements by the US Federal Reserve (Fed) Chairman about the possibility of an earlier than expected tapering of the US$85 billion bond purchase programme.
The statements and potential actions of the Fed have resulted in US dollar fixed income investment interest rates increasing. Considering that there is an inverse relationship between yields and prices—as yields fall, prices increase and vice versa, investments in fixed income assets are becoming more promising with higher yielding assets at better values in the US dollar bond space. With TTD investment opportunities and attractive yields limited, we at Bourse hold the view that the time is right for investors to look outside of our local market to benefit from higher quality assets and attractive yields.
From our ongoing research, we continue to find that quality USD and emerging market corporate bonds in the 5 to 10 year space offer investors significant yield pickup over similarly tenured local bonds. That is to say, an investor can benefit from extending his investment horizon to the medium term and adopting a hold-to-maturity approach. Investors with concerns of TTD depreciation will find this alternative attractive as a currency hedging strategy.
Exhibit 3 illustrates the difference in fixed income asset yields offered between local currency bonds and US Composite Curve.
As seen, Govt yields (as per the Bourse TTD yield curve) are broadly similar to those of US Treasury Bonds. The USD Composite BFV Curve, representing the average yields of comparable rating and maturity investment grade USD bonds, exhibits higher yields for the same tenors. For example, in a comparison of 5-year and 10-year tenors, the USD Composite (BBB) BFV possesses a yield roughly 100 basis points and 180 basis points higher than the equivalent TTD bonds.
For investors looking for more attractive yields with greater selections, we at Bourse therefore suggest and can provide to investors USD bonds as well as other high quality emerging market bonds.
For more information on these and other
investment themes, please contact Bourse Securities Limited, at 628-9100, e-mail us at
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