The impact of interest rates shocks on Namibia`s Treasury bonds pricing

Abstract

This study investigates the impact of interest rate shocks—caused by rising inflation, currency depreciation, and global commodity price fluctuations—on Namibian Treasury bonds. Using a Vector Autoregressive (VAR) model and Impulse Response Functions (IRFs), the research analyses how bond prices and yields respond to sudden interest rate shocks. The findings reveal that fixed-rate bonds, such as GC24, tend to react sharply and negatively to interest rate increases, especially during the first month. Conversely, inflation-linked bonds initially show a positive response to rate hikes, which is contrary to typical expectations; this suggests that during the study period, increases in the repo rate were perceived by investors as signals of rising inflation, leading to increased demand for inflation-protected securities. The study also finds that interest rate shocks significantly raise bond yields and borrowing costs, posing challenges to long-term debt sustainability for Namibia. Variance decomposition results indicate that short-term bond yield fluctuations are mainly driven by past yield shocks, while long-term movements are increasingly influenced by macroeconomic fundamentals and policy variables. Overall, the research highlights the importance of strengthening Namibia's bond market resilience and emphasizes the need for informed monetary and fiscal policy coordination. These insights are crucial for policymakers aiming to manage debt sustainability, stabilize markets, and develop bond instruments better equipped to absorb economic shocks.