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Investors return to longer T-bills as rates fall further
The Central Bank of Kenya in Nairobi. The expectation by some investors was that the CBK would yield to pressure and start accepting pricier bids in order to meet the expanded target. It did not.
Investors shifted their focus back to the one-year Treasury bill in last week’s auction, signalling reduced expectation that interest rates will go up in the short term.
The interest rate on the three-month tenor remained unchanged at 8.92 percent, with that of the six-month paper falling from 9.15 percent to 9.11 percent. On the one-year T-bill, the rate declined from 10.49 percent to 10.47 percent.
In the latest sale, the 364-day paper accounted for Sh18.47 billion out of the Sh35.81 billion put on the table by investors, followed by the 182-day tenor at Sh9.8 billion, and the 91-day at Sh7.52 billion.
In the preceding sale of March 6, the 91-day T-bill accounted for Sh23.95 billion out of the total bids of Sh50.55 billion, and in the February 27 auction, it contributed Sh17.96 billion to total bids of Sh36.5 billion.
Investors tend to concentrate bids on longer-dated paper in times of falling interest rates in order to lock in the relatively higher yields for longer in the expectation that future returns will be lower.
In the case of an expectation that interest rates will rise, they park their capital in the shortest duration of securities available (91-day T-bill) to avoid duration risk—which is when one is unable to take advantage of higher yields in future because they locked in capital in lower yielding securities.
The 91-day paper gives them the flexibility to buy a higher-yielding paper in the future due to its quick maturity.
The uncertainty over interest rates that had taken root from the last week of February was largely due to the upward revision of the government’s domestic borrowing target for the current fiscal year from Sh413 billion to Sh593.7 billion, via the second supplementary budget which is currently awaiting approval by Parliament.
The expectation by some investors was that the Central Bank of Kenya (CBK) would yield to pressure and start accepting pricier bids in order to meet the expanded target.
The CBK, however, continued to reject bids it deemed expensive in both Treasury bill and bond auctions over the last two weeks.
The sale of a reopened 25-year Treasury bond, which closed on March 5, saw investors bid Sh47 billion and ask for a return of 13.94 percent on average, which was higher than the bond’s actual interest rate (coupon) of 13.4 percent.
The CBK opted to leave Sh11.8 billion on the table, taking up Sh35.2 billion at an average yield of 13.8 percent.
The March 6 T-bill sale saw the CBK take up Sh42.5 billion out of the Sh50.55 billion it had been offered, signalling that it was unwilling to cede much ground in the rates standoff.
