Interest rates on Treasury bills settled at three-year lows after last week’s auction, as the market started pricing in the Central Bank of Kenya’s (CBK) latest rate cut.
The interest rate on the 91-day T-bill fell to 8.5 percent from 8.62 percent the previous week, while the rate on the 182-day paper declined to 8.89 percent from 9.03 percent. This is the lowest the two rates have gone since March 2022.
On the one-year Treasury bill, the rate fell to 10.23 percent from 10.38 percent, the lowest seen since December 2022.
The CBK’s momentary policy committee cut the base lending rate by 0.75 percentage points to 10 percent in its meeting on Tuesday, citing a need to stimulate lending by banks to the private sector and support economic activity.
The rate cut signals a fall in the returns on offer on government paper in the coming weeks, as the general cost of money in the economy comes down.
In recent auctions, investors have been affirming the expectations that rates will go down in the near term, by seeking out longer-dated securities.
In the T-bills market, investors tend to concentrate bids on the one-year paper in times of falling interest rates, in order to lock in the relatively higher yields that the tenor offers for a longer duration 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 future because they locked in capital in lower yielding securities.
Last week’s auction followed the same pattern as previous sales where the one-year T-bill attracted the highest volume of bids at Sh25.27 billion, versus Sh17.4 billion for the 91-day paper and Sh11.07 billion for the 182-day paper.
Total bids thus stood at Sh53.75 billion against the usual target of Sh24 billion, with the CBK taking up Sh43.54 billion as it sought to avoid expensive offers.
Similarly, appetite has remained high for longer-dated Treasury bonds, with investors keen on securing the paper at present rates before the returns fall further.
On Wednesday, the CBK closed a three-day tap sale of a 15-year bond (whose debut issuance was in February 2020) which was earlier reopened as part of April’s triple tranche issuance.
The tap sale had a target of Sh10 billion, but it raised Sh13.24 billion worth of offers from investors, with the CBK taking up Sh12.59 billion. In the earlier primary sale, the bond raised Sh20.88 billion from offers of Sh20.89 billion, at an average yield of 13.66 percent, versus its coupon of 12.75 percent.
In returning to the market with a tap sale, the CBK was leaning on a liquid market which saw Treasury bond and Treasury bills auctions oversubscribed.
The April bond issuance also included a 25-year bond first sold in October 2022, and another 15-year paper whose initial sale was done in April 2022. The issuance raised Sh71.4 billion overall, with the 25-year paper contributing the most at Sh32.5 billion.
