Investors in Treasury bills set off a new rush for the securities in the latest auction as they sought to lock in gains before rates fell further following last week’s 0.5 percentage point cut in the Central Bank of Kenya (CBK) base rate.
Bids in the sale came in at Sh71.18 billion, the highest subscription rate in 11 weeks. The CBK took up Sh59.4 billion, having had the luxury of leaving bids it considered expensive on the table.
As a result, interest rates across all three tenors of T-bills fell by their sharpest margin in three months. The 91-day rate declined to 9.11 percent from 9.52 percent, while that of the 182-day paper fell to 9.51 percent from 10.02 percent.
The 182-day rate had remained unchanged at 10.02 percent for seven straight auctions coming into last week’s sale. This is also the first time it has dipped below the 10 percent mark since February 2023.
Similarly, the 364-day T-bill saw its rate retreat in the sale, to 10.75 percent from 11.31 percent previously. The paper last traded at a rate lower than 11 percent in May 2023.
The sentiment by investors that rates will fall further was a result of the CBK slicing a half percentage point off the Central Bank Rate (CBR) in the February 5 monetary policy committee meeting as it seeks to boost lending by banks to the private sector.
At the same time, the CBK cut the cash reserve ratio (CRR) for banks from 4.25 percent to 3.25 percent, effectively freeing up to Sh57 billion in additional liquidity for banks to lend. The CRR represents the percentage of deposits that banks are required to keep at the CBK as reserves.
Ideally, the additional liquidity is expected to go towards customer loans, but banks are likely to park some of it in short-term securities as they wait for the demand for loans by the private sector to go up.
“Following low credit uptake, commercial banks are likely to continue pursuing investment in short-term government securities, pushing average interest rates lower,” said analysts at NCBA in an economic note on Friday.
“Moreover, with the Sovereign already recording considerable success on its domestic borrowing target, an upward revision of the target via a second supplementary budget is unlikely to alter the interest rates direction.”
The CBK is also likely to be more aggressive in pushing rates lower as it addresses a contraction in private sector credit by 1.4 percent in the 12 months to December.
The previous CBK rate cuts between August and December 2024 (by a cumulative 1.75 percentage points to 11.25 percent) also caused a pronounced decline in T-bill rates.
The T-bill rates fell sharply from highs of 16 to 16.99 percent in August to between 10.5 and 12 percent in December across the three tenors of the securities, before easing to the present levels at a more sedate pace in January.
While the cut in CBR has yielded a reduction in the government’s cost of borrowing, the translation on private sector loans has been more muted, hence the CBK’s decision to combine the latest cut with a liquidity injection through the CRR decision.
