The latest Treasury Bill auction by the Reserve Bank of Zimbabwe fell flat on its face as the bank was forced to reject all bids because of low interest by the bidders who only subscribed to 10% of the 300 million dollars worth of Treasury Bills on offer. The $300 million worth of paper gazetted on Tuesday 3 December with a 272-day duration (9 months). The Treasury Bills were once again intended to support government projects and the government will likely have to come back with an improved offer if it is intent on fuel ding these projects through this channel.
Only 10% of 300 million available was subscribed. With low-interest rates on offer between 15 and 15.5% the signs are starting to show that perhaps the banks are fed up of government borrowing and are beginning to move cautiously. In the recent past, the Treasury Bills were used to fund a cash strapped government. However, while the money was borrowed as US dollars it was paid back in the form of RTGS electronic funds and can be linked to the cash crisis we face today.
Understanding Treasury Bills
Let us simplify the terminology used in Treasury Bills to help make sense of what is going on here. Treasury Bill’s are short term debt through a government. The treasury bill does not make regular (or any) interest payments but is sold at below its face value ( a deep discount). So using the information we have from the RBZ on the last auction if you could but a $100 treasury bill you would pay $88.75 for it today. This is because the 15% is an annual rate but the Bills mature in 9 months so we must divide 15 by 9/12 (11.25). In 9 months time, the government would pay you $100 dollars back. Of course, these guys are dealing in millions but you can quickly see the problems with treasury Bill’s for those buying them and we can look at why the latest auction flopped.
Why did they fail?
Firstly the duration on the bills is too long. With our high inflationary environment, the money would lose value too quickly. Even using the purportedly understated ZimStat inflation figures in 9 months prices will have inflated 330% (440 by 9/12). Secondly, the duration is also unattractive given the issuer is borrowing monthly likely clockwork. Of course, the issuer can create more money to pay you back but when they create money the value of money declines both against goods & services and other currencies. It is an important indicator because it informs us that the banks do not see 9 months as a viable duration. It is not the first failure but it is the first complete failure since treasury bill reintroduction in August.
What’s next?
Well, government programmes still need funding and nobody is coming to our aid any time soon. We will likely see the government going back to the market with shorter duration papers as they did last time finding success with 182 days (6 months) bills. However, as inflation gets worse, which it is, shorter durations to maturity will be favoured with 90 and 60 days likely to be the best bets. Not the best thing if you are a cash strapped entity that continually needs to borrow as you must pay back much sooner.
