The government bond market in Trinidad and Tobago was somewhat subdued in 2015, with no public auctions of TT$-denominated debt taking place. However, as the government embarks on what should be an aggressive domestic borrowing programme in 2016 and the interest rate environment changes, activity could be set to increase markedly.
Activity On The Rise
Activity on the secondary market was muted in 2015, with the lowest traded value recorded since 2011. The value of bonds traded in 2015 across the Trinidad and Tobago Stock Exchange was just TT$82m – 91% less than the TT$964m traded value in 2014. The low-level activity could be attributed to a lack of public bond auctions, as no sovereign TT$ bonds were brought to market in 2015. There is a scarcity of government bond issues, which would have contributed to a low TT$ yield environment over the past six years. However, as of mid-April 2016 activity picked up, with over TT$470m in bonds being traded on the exchange year-to-date. This growth in activity has coincided with an observed rise in bond yields over the past several months.
Bond Yields Climb
The pace of increase in bond yields has picked up considerably over the past 12 months, driven by several factors. In the first instance, the Central Bank of T&T’s Monetary Policy Committee (MPC) has undertaken an initiative – through the use of the benchmark repo rate – to widen the positive interest rate differential between TT$ and USD interest rates in an attempt to mitigate potential capital outflows. Between September 2014 and December 2015, the MPC increased the repo rate by 200 basis points, from 2.75% to 4.75%, in eight consecutive rate hikes. These moves provided upward pressure on bond yields, although they achieved minimal success in preventing capital outflows.
An additional driver has been the expectation of increased government borrowing to fund a widening fiscal deficit, which has manifested particularly in sharply rising shorter-term yields, including 90-day and 180-day Treasury bills and 1-year open market operations paper. The shorter end of the TT$ yield curve appears to be adjusting more rapidly to developments in the interest rate environment, as evidenced by the 1/10 yield spread (the difference in yield between 1-year and 10-year government bonds) when compared to the 10/30 spread (the difference in yield between 10-year and 30-year government bonds). With respect to the 1/10 spread, the market observed a compression from 200 basis points in December 2014 to 140 basis points in March 2016, a change of 60 basis points. In comparison, the 10/30 spread dropped from 235 basis points to 195 basis points over the comparable period, a compression of just 40 basis points. The data suggests that investors are demanding relatively higher rewards for taking short-term risk with TT$ paper.
Credit Rating Migration
As would be expected under the current circumstances, the sovereign credit rating of T&T was downgraded by the international ratings agencies Standard & Poor’s (S&P) and Moody’s in April 2016. Moody’s cut T&T’s credit rating one notch, from “Baa2” to “Baa3”, just above the threshold for investment grade status. Moody’s also assigned a negative outlook to the rating. A similar downgrade was undertaken by S&P, which cut the sovereign rating from “A” to “A-” while also assigning a negative outlook. Overall, concerns were raised about the impact of low energy prices, as well as the timelines and effectiveness of fiscal reform implementation. The expectation of a rising debt burden also supported the case for a ratings downgrade. Undoubtedly, downward ratings migration will increase T&T’s cost of borrowing in the international space. As an indicator, yields on the country’s 4.375% USD bond due 2024 were trading at 3.9% in April 2016 following the ratings announcements. This is 40 basis points higher than the 3.5% yield in January 2015.