Treasury bond may fall short of the Sh10b target

Investors have given the 20-year treasury bond issue whose application period closes tomorrow a cold reception, spawning doubts whether the government would raise the targeted Sh10 billion from the debt paper— according to analysts.

Three of five analysts interviewed said that the uptake would be affected by what they termed as strained liquidity situation that saw last week’s issue of the weekly treasury bills record an under-subscription.

Closure of trading books by dealers in some financial institutions in the run up to the Christmas festivities was cited as the main cause of last week’s under-subscription of the three-month Sh4.5 billion T-bills while heavy consumer spending associated with Christmas festivities was seen as a factor limiting flow of cash into the capital markets.

Ms Linda Onyango, a dealer at NIC Capital, said that she expects that the bond will see less take-up than was the case for the previous bonds.

She said she expects a maximum of 60 per cent subscription and a minimum of 50 per cent.

“We see the issue as likely to receive lower take-up than is advertised. There is some liquidity squeeze in the market and this will likely affect the bond,” said Ms Onyango in a telephone interview.

She however said that she considered the return rate of 13.75 per cent offered for the 20-year bond as good enough adding that those who had excess cash from the most recent infrastructure bond offer were likely to put in their bids.

The infrastructure bond issue was worth Sh18.5 billion but the State received bids amounting to Sh44 billion, an indication of high liquidity in the market.

The 238 per cent subscription rate gave encouragement to the government to float even more bonds.

Ms Onyango said average interest yields demanded by investors who apply for the bond would be in the range of between 13.5 and 14 per cent.

The government’s indicative (coupon) interest rate for the long-term paper is 13.75 per cent, the same rate as that of the existing 20-year bond.

Investors putting in bids at 14 per cent would be pushing their limits, she said, adding they risked missing allocation as they were likely to fall outside CBK’s cut-off point.

A dealer who declined to be named for fear of anatagonising the CBK who are managing the issue estimated that bond applications received by Friday were worth just about half of the offer amount.

“Normally commercial banks don’t release money until the very last day that the offer is being closed. They have lots of things to do with the money before that day. So the rest of the money can be raised pretty fast once the deadline (Tuesday) approaches,” the source explained.

He said an under-subscription would become even more probable if more dealers close trading books ahead of the Christmas season.