Monday, June 30, 2008

Fixed income review

Published: Monday June 30, 2008

Central Bank Announcement

The Central Bank of Trinidad and Tobago (CBTT) announced on June 20 that they would maintain a RepoRate of 8.25 per cent. The decision to maintain the Repo Rate at 8.25 per cent was made even as headline inflation trekked backed up to double digits; from 9.30 per cent measured on a year-on-year basis (YOY) in April to 10.00 per cent in May. The CBTT indicated that the food sub index continues to be the main driver of headline inflation, in May there was a 21.80 per cent YOY increase, as compared to 19.50 per cent in the previous month. There has been a steady increase in the prices of breads and cereals (35.10 per cent), fruits (33.60 per cent), vegetables (22.60 per cent), oil and fats (20.20 per cent) and meats (13.40 per cent). Global increases in the price of cereals have led to the continuing rise in the price of rice and flour in the local market. Core inflation (inflation ex-food prices) remained relatively constant from last months 5.70 per cent.

The Bank (along with most other central banks around the world) emphasised that inflation is their main concern as food and energy prices continue to soar. The CBTT indicated that it would take additional action as needed to address inflationary pressures in the coming months. Even as headline inflation hits 10.00 per cent the CBTT also announced this month, that they will issue a TT$1 Billion bond at 8.25 per cent in order to strengthen its liquidity absorption measures in the financial market. This fact more than likely weighed on the Bank's decision to leave the Repo Rate unchanged at 8.25 per cent

The next RepoRate announcement is scheduled for July 25.

Interest Rate Report and Outlook

US dollar rates

The Federal Open Market Committee (FOMC) on June 25, ended a series of rate cuts in their benchmark rate, the Fed Funds Rate, which began at the start of the sub-prime crisis in September last year, as they left the rate unchanged at 2.00 per cent. This halt in rate cuts came on the heels of the Federal Reserve (the Fed) signaling that inflationary pressure is a cause for concern, as they pursue the goals of both economic expansion and price stability. Many analysts see this move as the first step in the path to raising interest rates, with Treasuries falling as the Fed announcement was made, the yield on the 10-year note rose 2 basis points by the close of trade.

The major cause of concern in the United States Market is inflation, with the Consumer Price Index (CPI) up 4.20 per cent over the past twelve months, compared to an average CPI of 2.70 per cent over the last decade, with the main drivers being oil and commodity prices. Crude oil rose past the $140 mark on June 26, the day after the FOMC announcement as the US dollar declined, in light of the Fed keeping interest rates constant, and as the European Central Bank is forecasted to boost interest rates once again; making commodities cheaper outside the US, spurring on demand. Forecasts suggest that oil will rise further as the summer peak consumption period approaches. Equities took a tumble as oil prices soared, with both the Standard & Poor's 500 and the Dow Jones Industrial down 3 per cent as oil reached the record $140 per barrel. It is forecasted that the Fed will begin raising interest rates in the third quarter, with a 25 basis point increase.

TT dollar rates

As part of their "special sterilisation measures" to mop-up the excess liquidity in the market in light of former RBTT shareholders receiving their cash consideration of approximately TT$8 billion, the CBTT, on June 14 announced the issue of TT$1 billion fixed rate bond, maturing in nine years. CBTT offers investors an attractive investment, that earns investors a coupon interest of 8.25 per cent that is guaranteed by the Government of Trinidad and Tobago (A-rating by S&P), and also allows small investors a chance to purchase a portion of the issue with the minimum face value being TT$1,000 up a maximum of TT$100,000 that can be obtained through a non-competitive bid. All other bids are placed competitively. Bidding on this issue closes today, Monday June 30.

In the several months leading up to the injection of the RBTT/RBC cash into the local system, liquidity in the market has been very tight, however now that former RBTT share holders have received their cash consideration, the market is flooded with excess cash. The result of this excess liquidity is driving deposit interest rates down, with 30, 60, and 90 day deposits earning 6.62 per cent, 6.81 per cent, and 6.95 per cent respectively on average compared to 6.94 per cent, 7.08 per cent, and 7.18 per cent a month earlier. On the longer end of the curve investors can earn on average 7.21 per cent for one year deposits down 19 basis points,a month earlier.

As interest rates in the market dip investors would be seeking alternative investments. Some might take up a piece of the Government issued bonds, others might invest in the local stock market, some will look to overseas investment opportunities and other will invest in the various mutual funds available. Investors however, should ensure that they chose appropriate investments that meet their risk/return objectives.


The yield on the latest 90-day T-bill (auctioned on June 4) has dropped to 7.04 per cent from the previous 7.12 per cent. As previously noted the CBTT is issues a new 8.25 per cent, nine year bond; we can see that the shorter end of the curve has adjusted upwards as investors would prefer investing in the newer issue. The longer end of the curve has remained relatively unchanged.

Source: Trinidad Express Newspapers

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