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Investors demand 9pc return on T-bills despite CBK move
Investors sought higher returns on Treasury bills as rising inflation reduced real yields, despite CBK's expectation that price pressures will remain within its target range.
Investors demanded a return of up to nine percent on Treasury bills in the latest auction despite the Central Bank of Kenya (CBK) holding its base rate at 8.75 percent, to signal that it expects inflation to moderate in the near term.
T-bill rates across the three tenors have risen by between 0.7 and 1.3 percentage points as investors seek higher compensation to cover rising inflation caused by the three-month war in Iran.
In the latest sale last Thursday, the 91-day T-bill rate rose to 8.7 percent from 8.55 percent, the 182-day from 6.52 percent to 8.6 percent and the 364-day rate from 8.76 percent to 8.87 percent. Investors sought an average of 8.76 percent on the 91 and 182-day papers, and 9.1 percent on the one-year T-bill, but the CBK rejected expensive bids in order to prevent a sharper rise in the short-term rates.
These demands for higher rates came even as the CBK signalled to the market that it is optimistic that inflation rates will peak below the upper limit of its target range of 5 percent plus or minus 2.5 percentage points. Headline inflation stood at 6.7 percent in May, having gone up from 5.6 percent in April and 4.4 percent in March.
Following the Monetary Policy Committee (MPC) meeting held last Tuesday, CBK Governor Kamau Thugge said the bank opted to hold the rate to take stock of the evolving situation in Iran, in line with similar cautious stances by central banks in developed markets.
Dr Thugge said that overall inflation is expected to remain within the target range of 5 percent plus or minus 2.5 percentage points in the near term, with an expectation of easing of the conflict in the Middle East.
“We expect that with the de-escalation, the highest the overall inflation will reach is about 7.2 percent in February 2027,” said Dr Thugge.
By opting to keep its base rate unchanged, the CBK also considered the fact that the current spike in inflation is driven by higher prices of imported fuel and consumer goods (imported inflation) rather than underlying demand pressures in the economy.
When inflation goes up, central banks tend to raise rates in order to reduce the supply of money in the economy and tame demand and a rise in prices of goods and services.
These rate hike measures are, however, more effective in cases of demand-driven inflation where higher prices are caused by too much money chasing few goods.
In the current situation, inflation is being driven by supply-side price increases in the form of costlier fuel and imported goods due to the Iran war, meaning that a rate hike would not necessarily yield lower prices in the economy.
For investors in the government securities market, however, higher inflation eroded the real returns from their assets, regardless of whether it is demand or supply-driven. They have also concentrated their uptake on the 91-day T-bill to retain the ability to take advantage of any rate increase in the short term.
Last week’s auction saw investors bid Sh32.83 billion on the 91-day paper against its target of Sh4 billion. The CBK accepted Sh26.86 billion from these offers.
The 182-day T-bill attracted bids of Sh4.4 billion against a target of Sh10 billion, while the 364-day paper raised offers worth Sh2.14 billion against its target of Sh10 billion. The CBK took up Sh3.9 billion and Sh1.9 billion, respectively, from the six and 12-month papers.
