Errol Gregory, Contributor
THE local money market is enveloped by a labyrinth of uncertainty and tentativeness.
This latest bout of uncertainty is linked to the latest hike in T-Bill rates that saw the average yield on 274-day bills jump from -17.6 per cent to 19.67 per cent and the 365-day bills hiked from 18.10 per cent to 20.97 per cent.
One investment manager/primary dealer commenting on the uncertainty that pervaded the market said, "The market is now so uncertain that I am sometimes reluctant to give clients advice because there are so many imponderables regarding interest rates." Elaborating on this current dilemma, he said that while the Bank of Jamaica (BoJ) was offering a high of 22 per cent on its one year repos, the private repo market paid 25 per cent on 30-day repos. "Going short is definitely the way to go again," he said.
Pall
This pall of uncertainty over the market reflected not just the extent of rate increases at one go, but more so the reluctance of the authorities to make any move to contain the rate increases. Only weeks ago, when BoJ was forced to intervene in the market by jacking up repo rates, it took compensatory strategies to offset these increases by refusing to roll over its T-Bill instruments and merely paid out the amounts outstanding to investors.
So while the Ministry of Finance did get some flak for the change in its strategy of not allowing investors a chance to roll over their instruments, at least the authorities had a strategy. Last week, however, not only was there no clear strategy but the Ministry of Finance, raising funds for Government's coffers, put T-Bills on the market at the same time that BoJ had declared its hands in terms of the high 20 per cent and 22 per cent yields obtaining in this market.
Meanwhile, some analysts have been prepared to refer to this obvious conflict in the roles of these two pivotal institutions, in which there was obviously no collaboration, as a "mere divergence" in roles. However, putting two instruments on the market at the same time, in a scenario where rates were bound to move up, can hardly be dismissed as a little quirk as it has tremendous implications for the market, specifically debt servicing costs. Additionally such an occurrence merely serves to cause investors to lose confidence in the monetary authorities and introduces a further element of uncertainty.
One indication of the present uncertainty facing the market is the vague divided response of investment managers to the latest United States index bond on the market. The two-year bond pays 11.25 per cent and the rate of exchange for payment is the 10-day moving average selling rate multiplied by a factor of 1.005. This time around the investor has the option to receive payments of principal and the final interest payment at maturity in US dollars subject to three months notice. The sweetener of US dollar payments is seen by some analysts as a definite plus that should make the market warm to this bond.
On the other hand some analysts/investment managers contend that while some investors may go for the instrument as part of a diversification strategy, they may be reluctant to part with their funds for two years given the high opportunity cost of that decision (the high short-term yields). This kind of divergent response from investment managers merely reinforces the level of uncertainty in the market among those who should be aggressively pushing the bond.
Hiccups
This confirms the difficult job that the monetary authorities have when there are hiccups in the marketplace, whether they are shortlived or not. In this case, the decision of the authorities to give investors the sweetener of payments in US dollars, having already indexed the rate of return to a specified exchange rate, is indicative of the high costs associated with unpredictable monetary policies.
More fundamentally, however, the increased costs associated with monetary policy and attendant uncertainties in the market, remind us of the problems we face in pursuing myopic monetary policies that subjugate a stable predictable money market to the exigencies of maintaining a stable dollar at all costs.
Only a week ago, Prime Minister P.J. Patterson had a press conference at which he told senior journalists that the latest hike in short term rates was analogous to turbulence sometimes experienced by an aircraft.
The weakness with this analogy is that everytime there are flip-flops in interest rates and policy changes on the money market, they generate uncertainty that ultimately translates into higher costs and feed a climate of uncertainty which is real but difficult to quantify.
In the meantime, as the year draws to a close and individuals and companies are anxious to make predictions on likely changes in interest rates, the forecast remains: uncertainty, uncertainty, uncertainty. Hardly a positive way to start the new millennium.
