Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Treasury bill rates rise above 9pc as US renews Iran strikes
Kenya’s inflation stood at 6.4 percent in June, coming down from 6.7 percent in May, but still significantly higher compared to the rate of 4.3 percent in February, when the Iran war started.
The interest rate on the one-year Treasury bill has climbed above nine percent for the first time in five months on fears of higher inflation after the US and Iran renewed hostilities last week.
The Central Bank of Kenya (CBK) had successfully kept the 364-day rate below 9 percent for the past month, but it relented in the Thursday auction, agreeing to pay 9.04 percent for the one-year debt from 8.99 percent in the previous sale.
Analysts had expected interest rates to start coming down after the US and Iran agreed an interim 60-day ceasefire last month.
However, the agreement has all but collapsed, with the two countries trading retaliatory airstrikes in the past week and once again closing the key Strait of Hormuz, which was partially reopened last month.
As a result, the price of Brent Crude—the global benchmark—rose by 12.8 percent to $86.75 a barrel between Monday and Friday, triggering fears of a new round of global inflation.
Investors usually demand a higher return on government securities when inflation goes up. Higher inflation erodes the real returns from their assets, which come with a fixed annual interest rate.
Kenya’s inflation stood at 6.4 percent in June, coming down from 6.7 percent in May, but still significantly higher compared to the rate of 4.3 percent in February, when the Iran war started.
“Inflation has remained above the CBK's 5 percent midpoint target for three consecutive months, despite June inflation easing slightly to 6.4 percent. Elevated inflation continues to be driven by higher fuel, transport, food, and utility costs,” said analysts at Sterling Capital.
“All indications suggest interest rates continue on their gradual rise as this alongside the huge budget deficit will encourage aggressive bids in debt auctions.”
On the shorter 182-day and 91-day T-bills, the CBK was able to hold off higher rates this week by rejecting expensive bids.
The 91-day paper saw its rate fall to 8.79 percent from 8.82 percent, but only after the CBK turned away half of the offers that investors made on the paper. The regulator took up Sh12.9 billion out of the bids worth Sh24.4 billion put up by investors on the paper, at an average asking rate of 8.83 percent.
On the 182-day T-bill, the rate remained unchanged at 8.97 percent, as the CBK took up Sh13.2 billion out of bids worth Sh15.2 billion.
Since the war in Iran started on February 28, rates on the 91-day and 182-day Treasury bill have gone up by 1.4 and 1.2 percentage points respectively.
The uncertainty over the Middle East war has also forced the CBK to halt its base rate cuts. During the monetary policy committee meeting on June 10, the CBK kept the base rate unchanged at 8.75 percent, saying it needed to take stock of the evolving situation in Iran.
In the bonds market, investors also demanded a higher return in a switch sale that was carried out last week.
The sale saw the CBK ask holders of a five-year paper issued in 2021 to transfer Sh10 billion into a 20-year bond that was issued in 2012, which matures in November 2032.
Investors agreed to switch Sh7.95 billion in the sale, but demanded a higher return (yield) of 12.8 percent compared to the 20-year bond’s annual interest rate of 12 percent.
They were handed a discount of Sh1.33 per bond unit of Sh100 to make up for the difference between the return they were asking for and the bond’s actual interest rate.
Ideally, a unit of a bond is priced at Sh100, with investors getting a return from the paper’s fixed interest rate.
However, when a reopened bond pays a lower return compared to what the market is demanding, investors are given a discount on the Sh100 in order to entice them to lend to government.
In the last MPC meeting on June 10, the CBK kept the base rate unchanged at 8.75 percent, saying it needed to take stock of the evolving situation in Iran, in line with similar cautious stances by central banks in developed markets.
