The interest rate on the one-year Treasury bill has fallen by nearly one percentage point in the last eight weeks, narrowing its return premium over the 91 and 182-day papers that had caused investors to concentrate their bids on the longest tenor.
The 364-day paper is now paying an annual interest of 8.34 percent, down from 9.2 percent at the beginning of February. In the same period, the rate on the 182-day T-bill has gone up from 7.80 percent to 7.83 percent, while the return from the 91-day tenor has fallen from 7.63 percent to 7.56 percent.
The sharper drop in the one-year T-bill rate has narrowed its margin over the other two tenors from 1.57 percentage points to 0.78 percent.
Due to the return premium, bidding in the period was heavily slanted toward the one-year paper, coinciding with a period of high liquidity in the market, which saw investors offer the government Sh459.2 billion in the T-bills auctions held between January 29 and March 12.
The 364-day T-bill accounted for 77.4 percent or Sh355.6 billion out of these offers, but the Central Bank of Kenya (CBK) rejected Sh152.4 billion in a bid to force the rate on the paper down and avoid a refinancing headache when the debt comes due in a year.
Last week’s auction that had total bids of Sh35.26 billion, however, bucked the trend, with the 91-day paper proving the most popular with bids of Sh14.5 billion, ahead of the 364-day paper (Sh10.5 billion) and the 182-day tenor (Sh10.29 billion).
Even with the evening out of the bids, the CBK still rejected half of the cash offered on the one-year paper, helping lower its yield to 8.34 percent from 8.48 percent.
“Currently, ample market liquidity amid strong investor search for yield and safety is providing room for the fiscal agent (CBK) to reject expensive bids, keeping yields contained,” analysts at NCBA Investment Bank said in a fixed income note.
For the government, heavy bidding on one of the three tenors over a prolonged period exposes it to future cash flow constraints when it needs to refinance or roll over the debt.
For instance, in March 2027, the one-year T-bill will have larger weekly maturities compared to the other two tenors, owing to the higher bid volumes seen this year.
To avoid such exposure, the CBK prefers to spread the uptake from any particular auction across the three tenors, which helps to smooth future maturities across three, six, and 12 months.
For investors, falling interest rates lead to demand for longer-dated securities that offer higher-than-average yields, leading to concentration of bids on such papers despite the duration risk.
With its premium above the other two papers, therefore, the 364-day T-bill emerged as the favoured option for investors in the last two months.
On the other hand, when rates are going up, investors seek the shortest-dated papers, such as the 91-day T-bill, to retain the flexibility to take advantage of higher rates in the near term.
Since August 2024, the CBK has made 10 straight rate cuts, bringing its base rate down to 8.75 percent from 13 percent. These rate cuts have caused interest rates on Treasury bills to halve to a range of 7.56 percent to 8.34 percent, from a range of 16 to 16.99 percent.
Similarly, Treasury bonds have seen their top interest rates fall from highs of 18.5 percent in 2024 to about 13.5 percent today.
The CBK was expected to make a further cut in the upcoming April monetary policy committee meeting, but the threat of higher inflation due to the war in Iran is likely to force a pause in the policy easing trend.
