Is Treasury yield compression running ahead of issuance risk?

By Joshua Worlasi AMLANU

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The Treasury bill market has rallied sharply at the start of 2026, with interest rates falling fast as investors rush into government securities. While the move reflects improving inflation and strong demand, amid further rate cut expectations, it is also raising a key question: are yields falling too quickly, before the government has issued most of the debt it plans to sell this year?

So far, the government has only completed a small part of its 2026 domestic borrowing programme. Yet short-term Treasury bill yields have already dropped by more than one percentage point in just two weeks. That gap between falling yields and still-heavy future borrowing is what worries some investors.

Between early January and February 9, total bids at Treasury bill auctions reached GH¢74.42billion, showing strong and persistent demand. Of this amount, the Treasury accepted GH¢54.29billion and rejected nearly GH¢20billion, as it moved to limit how much it borrowed at lower interest rates.

Over the same period, GH¢40.98billion in bills matured. This means net new domestic debt issued so far stands at about GH¢13.31billion — less than 20 percent of the government’s full-year domestic financing target.

Despite this relatively modest issuance, yields have fallen sharply. Over the two weeks to February 9, the 91-day Treasury bill yield dropped by a cumulative 123 basis points. The 182-day and 364-day bills declined by 84 basis points and 100 basis points respectively.

For some market watchers, the speed of the decline suggests investors may be pricing in comfort too early, before the government’s larger borrowing needs begin to weigh on the market.

February marks a turning point

The shift in sentiment became clear in February. In January, Treasury bill auctions were already attracting solid demand, but yields were mixed or drifting higher as refinancing pressures dominated. Investors were still cautious, even as bids exceeded targets.

That changed in early February, when inflation data surprised on the downside and expectations of further policy easing strengthened.

At the February 9 auction, investors submitted GH¢17.42billion in bids, about 2.5 times the target amount. The Ministry of Finance accepted just GH¢5.83billion and rejected GH¢11.42 billion, even though the accepted amount comfortably covered maturities of GH¢4.84billion.

Yields fell again, with the 91-day bill easing to 9.97 percent, the 182-day bill to 11.82 percent and the 364-day bill to 12.06 percent.

A week earlier, on February 2, bids totalled GH¢17.11billion against an offer of GH¢6.99billion. The Treasury accepted GH¢12.31billion, covering maturities of GH¢6.81billion and marking the first clear break in a five-week upward trend in yields.

Inflation gives investors confidence

The sharp fall in yields has been supported by a rapid improvement in inflation.

Headline inflation slowed to 5.4 percent year on year in December 2025 from 6.3 percent in November, before falling further to 3.8 percent in January 2026. Core inflation, which excludes energy and utility costs, dropped to 4.6 percent in December from 23.1 percent a year earlier.

These numbers strengthened confidence that inflation pressures have eased across the economy, helped by stable currency conditions, lower food prices and favourable base effects.

Against this backdrop, the Bank of Ghana cut its policy rate by 250 basis points to 15.5 percent in January, a deeper cut than many analysts had expected. The central bank said its 2025 inflation target had been met and expects inflation to remain within its 8 percent plus or minus 2 percent target band in 2026, provided fiscal discipline is maintained.

Policy easing largely priced in

In a note to clients, Apakan Securities said the central bank’s guidance supports the recent rally but warned that the scope for further yield declines may be limited.

“Even with the sizeable rate cut, real interest rates remain meaningfully positive, meaning monetary conditions are still restrictive compared with current inflation,” the firm said. “With price pressures easing, inflation is likely to stay within the target band in 2026, but we expect the central bank to pause further adjustments in the near term.”

The firm added that most of the policy easing had already been priced into the market, suggesting any further yield compression is likely to be gradual rather than sharp.

Bigger borrowing still ahead

The concern for investors is that the biggest borrowing test still lies ahead.

According to the 2026 Budget, the government plans to raise GH¢71billion in domestic financing this year, equivalent to 4.4 percent of GDP. This will be done mainly through short- and long-term government securities.

In addition, the government plans to issue GH¢10billion in domestic infrastructure bonds later in the year. The bonds will be issued in two GH¢5billion tranches, with maturities of 10 to 15 years and tax-exempt status for investors. The funds will support roads, energy, housing and other projects under the Big Push programme.

Analysts expect strong demand for the infrastructure bonds, but their arrival will still add to overall supply in the domestic market.

Regulation adds to demand

Demand for government paper has also been supported by regulatory changes. The Securities and Exchange Commission has directed local fund managers to cut back on offshore investments in a move aimed at protecting the cedi and strengthening macroeconomic stability.

The regulator has capped foreign securities at 20 percent of assets under management and restricted funds that previously had full offshore exposure. The measures are expected to redirect more money into domestic assets, including Treasury bills and bonds.

While this supports demand in the short-term, some analysts warn it could increase concentration risk and reduce diversification for local investors.

Comfort today, questions tomorrow

For now, strong liquidity, falling inflation and regulatory support have allowed the Treasury to borrow selectively and push yields lower. Aggressive bid rejections show the government is no longer forced to accept all demand at higher rates.

But the key question remains whether today’s yields fully reflect the amount of debt still to come.

With less than one-fifth of planned domestic borrowing completed and larger issuance scheduled for later in the year, investors will be watching closely to see whether demand remains strong once supply increases.

In simple terms, the market is betting that the country’s improving economic conditions will hold. The risk is that yields have already fallen as if the hard part is over, when, in reality, most of the borrowing is still ahead.

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