Investors splashed Sh181.4 billion into three-month Treasury bills over the past 10 weeks, presenting the National Treasury with a cash crunch headache as debt falls due in Mid-August.
The previous 10 auctions held between March and May saw the 91-day paper raise a cumulative Sh67 billion.
The T-bill auctions have been skewed towards the 91-day paper since mid-May, as investors avoid locking in their money for long periods in the hope that interest rates would rise.
By retaining their exposure for a minimum of three months, investors retain the flexibility of reinvesting their funds at higher rates in case rates keep rising.
The huge uptake of Treasury bills has piled pressure on the Treasury to seek the Sh181.4 billion to repay investors from mid-August.
Investors can either take out their money or roll it over into new securities when the debt comes due.
When maturities are large, investors usually demand a higher interest rate in order to do a rollover or delay payments.
Heavy foreign and domestic interest payments strained public coffers, forcing delayed disbursements to local authorities and payments to contractors.
Financial markets have been volatile since February, marked by shocks from the Iran war that has caused higher global inflation.
In response, central banks have paused their monetary easing, while rates on government bonds and Treasury bills have risen as investors seek higher compensation to hedge against erosion of real returns by inflation.
In the Kenyan market, the last 10 T-bill auctions have attracted Sh262.3 billion in bids on the 91-day tenor, against the government’s target of Sh52 billion.
Out of these offers, the Central Bank of Kenya (CBK) has taken up Sh181.42 billion, rejecting nearly a third of the bids on the paper in an effort to keep a lid on rising interest rates.
The 182-day Treasury bill has raised Sh59 billion from investor bids worth Sh63.9 billion in the period, meaning that it has underperformed the government’s target of Sh100 billion.
Similarly, the 364-day paper has underperformed in meeting its target of Sh100 billion, having raised Sh57.8 billion against bids of Sh58.9 billion.
The previous 10 auctions held between March and May saw the 91-day paper raise a cumulative Sh67 billion, lower than the Sh74.6 billion raised through the 182-day paper, and Sh74.03 billion on the one-year T-bill.
This shows that momentum in the market has swung to the shortest of the three papers.
The CBK prefers an even spread in volumes between the three tenors in order to maintain a steady maturity profile of the short-term debt throughout the fiscal year.
Heavy concentration on one tenor means that the apex bank will face a large volume of maturities bunched up in a short period at some point in the year, putting pressure on the exchequer if the market is unwilling to rollover the funds into the other longer-term T-bills or longer-dated Treasury bonds.
The Treasury faced such a crisis in March 2017, when investors were pumping in large volumes of cash into the 182-day T-bill.
The CBK responded by suspending the issuance of the six-month paper for two months to prevent refinancing problems down the road. This had the effect of pushing bids to the other two tenors, spreading future repayments.
The refinancing risk triggered by repayment of short-term debt comes after the withdrawal of a proposal to discontinue the one-year Treasury bill under the medium-term debt strategy.
The Treasury hinged the withdrawal on the quest to lower the debt maturing within one year as a share of GDP, and lengthening the maturity of domestic and external loans.
This proposal was, however, dropped in the final draft of the debt strategy, and was not reintroduced in the 2026 version that was published in January this year.
Over the last five years, the government has made efforts to reduce the refinancing risk on its domestic debt by cutting the share of the debt held in T-bills, whose frequent repayments create a cash crunch for the exchequer.
As of last week, the share of the government’s domestic debt held via T-bills stood at 15.31 percent, equivalent to Sh1.12 trillion. This share has come down from highs of 34 percent in June 2019, reflecting the years of efforts by the CBK to limit the uptake of new debt through the short-term securities.
Bonds accounted for 82.15 percent, or Sh6.02 trillion, with the State’s total domestic debt standing at Sh7.33 trillion.
