Investors in government debt continued to seek out longer-dated securities last week, upholding expectations that rates will go down in the near term.
The investors were also looking ahead at today’s Central Bank of Kenya (CBK) monetary policy committee (MPC) meeting, with analysts and bankers saying that the apex bank has room to make a further rate cut to stimulate private sector credit growth, amid stable inflation and exchange rate.
In the bonds market, the CBK auctioned a trio of reopened bonds for its April issuance, seeking Sh70 billion from the market. Investors offered the CBK Sh71.73 billion, from which it took up Sh71.4 billion.
The issuance comprised a pair of reopened 15-year bonds which were initially floated in February 2020 and April 2022, and a 25-year paper first sold in October 2022.
The 25-year bond accounted for the highest volume of bids at Sh32.68 billion, with bids on the 2020 paper at Sh20.89 billion and the 2022 paper at Sh18.15 billion.
The investors on the 15-year, 2022 bond also accepted less returns in the form of effective yield (13.82 percent) compared to the coupon or actual interest rate of the bond (13.94 percent), highlighting their determination to get their hands on the paper even if at a premium.
The lower yield compared to coupon meant that the buyers paid a price premium of Sh0.66 per bond unit of Sh100 in order to secure the paper.
“The issue was oversubscribed given high market liquidity and growing investor appetite for medium and longer tenor debt with the decline in interest rates,” analysts at Sterling Capital noted in a brief on the bond result.
“We expect rates to continue on a downward trajectory with further CBR cuts expected. We estimate a central bank rate (CBR) cut of 25 to 50 basis points in the April 2025 MPC meeting, as the CBK seeks to increase private sector credit, manage banking sector non-performing loans (NPL), and reduce government borrowing costs.”
In the Treasury bills sale on Thursday, a similar trend of investors going for the longest-dated paper was witnessed.
The 364-day T-bill accounted for Sh25 billion or 61 percent of the total bids of Sh40.7 billion raised in the auction for all three tenors. The 182-day paper and the 91-day paper had bids worth Sh4.5 billion and Sh11.2 billion.
Investors tend to concentrate bids on the one-year T-bill 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 will 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 the future because they locked in capital in lower yielding securities.
Returns across all three papers also continued to decline, with the 91-day T-bill rate falling to 8.62 percent from 8.79 percent the previous week.
The 182-day T-bill saw its rate decline to 9.03 percent from 9.05 percent, while the 364-day paper’s rate retreated to 10.38 percent from 10.41 percent.
