SIKAKROM with Gideon DONKOR: T?Bill Rally: Confidence, Constraint, or Intervention?

This week, the treasury bill yield reached a level I never expected to see in my lifetime—especially just three years after a sovereign debt default. The latest auction shows the 91-day T-bill yield at 4.8%, a massive drop from 26.3% at the start of last year. By any measure, this is an impressive market rally. However, here is what should concern you: even as rates have reached new record lows, the cedis continue to attract buyers as if nothing is amiss. Most people expect lower interest rates to mean the cedi will fall against the dollar, but markets do not reward you for following conventional wisdom—they reward you for spotting exceptions. When government bond values surge higher while the cedi resists moving smoothly downward, it is a sign that something unusual is occurring.

For reference, short-term interest rates are currently 3.7% in the United States and 3.8% in the United Kingdom. This means Ghanaian government bills offer investors just a 100–110 basis point premium compared to short-term debt from these countries. When evaluating sovereign bonds, investors tend to look at whether the interest payments will keep pace with inflation and currency depreciation. Presently, market sentiment suggests that a 110-basis point premium is seen as fair compensation for the risk that the cedi could lose value against the US dollar or pound sterling in the near term. However, this premium is quite small when compared to historical performance and does not represent relative value. For instance, Côte d’Ivoire’s three-month bond yields at 5.88%, provides a much larger premium of 220 basis points—even though their currency is pegged to the euro, their credit rating is four levels higher than Ghana’s, and they have averaged just 2.51% inflation over the past 25 years.

Start with the obvious question: why did yields collapse this fast? The government and markets will once again invoke the confidence fairy to tell you it is “confidence returning.” That is only partially true. The more practical explanation is that the pricing of short-dated government paper is the outcome of four forces moving in the same direction at once: ((1) the government’s intentional management of auctions by reducing its need to borrow domestically at high rates, (2) limited investment options among banks and pension funds, (3) a significant decrease in the risk premium required by investors after inflation fell dramatically and (4) the market activities of the Bank of Ghana.

First, supply matters. After the default, government’s financing mix changed: longer-dated domestic bonds were restructured, and borrowing shifted to short-dated bills. Starting last year, policymakers deliberately worked to lower interest rates on treasury bills by controlling auction results. They accepted only bids that offered yields closer to 10%, which meant the government was willing to take lower bids in order to reduce yields—even if it risked not raising enough money. Consequently, rates dropped noticeably, even though about half the auctions up to November were undersubscribed. In the end, the government raised just GH¢10 billion out of the planned GH¢40 billion target. Due to insufficient funding, expenses had to be reduced, resulting in a greater positive primary balance than expected. When the primary balance improves, the weekly pressure to clear large T-bill auctions at any price falls. Less supply chasing the same pool of buyers mechanically lowers the yield that clears the auction.

Second, demand matters just as much. In a post-restructuring environment, many institutional investors are structurally biased toward short tenor. If you are uncertain about duration risk, you buy time. Bills become the default “parking asset” for banks managing liquidity ratios, for funds rebalancing after losses, and for corporates holding precautionary cash. When that preference becomes crowded, you get a scarcity premium: investors accept lower yields not because they are euphoric, but because they are competing for the same short, liquid instrument.

Third, the macro price anchor shifted. As inflation decelerated from crisis levels and policy credibility improved, investors stopped demanding the same inflation hedge in short-term rates. The market does not trade the current inflation print; it trades the path. If participants believe inflation will keep easing and the central bank will not be forced back into emergency tightening, then a 91-day instrument can trade at a low single-digit nominal yield—even if the memory of 20% rates is still fresh.

Fourth, an amendment to the Bank of Ghana Act now authorizes the central bank to purchase Treasury bills up to five percent of the previous year’s revenue. This change allows them to act as a “stalking horse” during auctions, strategically placing bids to achieve lower rates. Notably, half of the T-bill auctions prior to the passage of the new act failed; however, since its enactment, auctions have been oversubscribed, and bid-cover ratios have consistently reached or surpassed 2. A robust interpretation of the legislation indicates that the central bank could acquire approximately GH¢9.3 billion of bills at the end of last year and around GH¢10 billion this year. Their involvement appears to have significantly influenced early-year auctions by contributing to a reduction in rates. Although this mechanism may eventually be regarded as indirect government financing with potential for increased inflationary pressures, for now it aids fiscal management amid diminished government revenue by helping to contain interest costs.

Put differently, the yield is not only a “reward”; it is also an insurance premium. After a restructuring, that premium can compress quickly when (a) payment timing becomes more predictable, (b) rollover risk looks manageable at the bill end, and (c) domestic institutions are effectively required—by mandate, regulation, or risk management—to hold government paper. Add auction microstructure (how much is offered, how aggressive central bank bids are, and whether the market expects partial allotments) and you can get moves that look irrational but are simply technical.

What does this mean for government? Lower bill yields reduce near-term interest costs and make cash management easier. They also create a tempting illusion of fiscal space. The danger is complacency: if the state treats low yields as permanent and continues to ramp up short-term borrowing, rollover risk escalates. The healthiest use of this window is to lengthen the maturity profile where possible, rebuild buffers, and lock in credibility before the next shock forces the market to reprice risk.

What does this mean for banks? Falling bill yields are a double-edged sword. On one hand, bond prices rise when yields fall, improving mark-to-market positions and easing some balance-sheet stress. On the other hand, reinvestment risk hits earnings: maturing high-yield paper rolls into low-yield paper, compressing net interest margins unless banks can reprice deposits down or expand higher-yielding credit safely. In plain terms, the easy “risk-free carry trade” is being taken away. That pushes banks toward a harder job: real intermediation—more private credit, better underwriting, and more focus on fees and transaction income. This also means a riskier balance sheet that requires more capital and by extension a lower return on equity.

What does this mean for the currency? Conventional models suggest that lower domestic yields typically weaken the cedi, as the narrowing interest-rate differential versus the dollar reduces its relative attractiveness. A smaller gap between short-term interest rates in two countries diminishes incentives for capital to move from the country with lower yields to one offering higher returns, thereby influencing exchange rates. As the yield advantage wanes, the higher-yielding country’s currency may experience depreciation pressures, or conversely, the lower-yielding currency may appreciate. That logic is directionally right, but timing is everything. If the fall in yields is driven by improved inflation expectations, steadier fiscal financing, and domestic liquidity trapped in short instruments, the currency can stay firm for longer than expected—especially if the central bank is heavily intervening in the FX market. The real risk is second-order: once the market internalizes that the “carry” has disappeared, marginal demand for cedi assets becomes more sensitive to any wobble in inflation, reserves, or fiscal discipline. In that world, the cedi does not drift lower smoothly; it reprices in giant steps.

What does this mean for investors?  People who hold cash and doubt the sustainability of long-term policies are advised to think about converting their funds into foreign currency and buying foreign bonds, given that the cost is only a 1% yield difference. The ongoing search for higher returns can also drive capital from cash into real estate and stocks, which has the potential to create asset bubbles. In times like this, capital tends to flow rapidly in and out of markets as interest rates and currencies fluctuate. Individuals with access to offshore markets may consider investing in assets that are positioned to capitalize on increased volatility, such as options on equities with significant exposure to the Ghanaian market or dual-listed entities.

So yes, the rally is real. But the more important question is whether it is being powered by durable fundamentals—or by temporary technicals and central bank intervention that will reverse the moment conditions change. If inflation expectations rise, reserves tighten, or fiscal slippage resumes, markets will swiftly reprice—starting with bills, then currency, and finally all related assets. The trade, in other words, is not “rates are low”; it is “policy is in control.” And control is never permanent. But what do I know?

Gideon is  an avid reader, dog lover, foodie, closet sports genius but a non-financial expert

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