Buyers rush for high returns on 3-month Treasury securities

An investors’ rush to lock-in double-digit returns on Treasury bills has resulted in high over-subscription of the government papers in recent weeks.

In the latest 91-day T-bill auction, investors put in bids worth Sh17.6 billion, exceeding by more than four times the Treasury’s offer of Sh4 billion.

This forced interest rates on the instrument to come down to 10.267 per cent — a 1.7 percentage points drop from the previous week.

The Treasury accepted Sh5.45 billion of the bids, which was Sh1.45 billion more than the offered amount.

Expectations of further drop in the inflation rate are expected to push the rates further down.

The rate of inflation dropped to 7.74 per cent in July from 18.31 per cent in January this year — falling below the Central Bank of Kenya’s target of nine per cent.

“Investors are expecting inflation to come down, so they know rates are also on the way down and are going for the treasury securities now.

There is a lot of liquidity in the market, so that is why you see the huge amount in terms of bids,” said Crispus Otieno, a dealer with Afrika Investment Bank (AIB).

The CBK has been mopping up shillings from the market by floating repurchasing agreement (repos) of mostly seven days.

On Thursday, Reuters reported the CBK was out for Sh12 billion ($143 million), having increased its mop-ups in a bid to achieve the double aim of stabilising the Kenya shilling and drying excess liquidity from the market. In the previous week, liquidity was also in excess with bids for the T-bills offered for sale reaching about Sh38 billion, from which the government only picked about half. “Liquidity is high because the CBK is only mopping for seven-day periods.

But if it were for 91 days, then liquidity would shrink,” said Alexander Muiruri, a dealer at Africa Alliance Investment Bank. Interbank rates have also been dropping rapidly in the past two weeks.

On August 15, the average rate was at 7.95 per cent down from 12.98 per cent on July 26 this year – a drop of about four percentage points in a fortnight.

This means it is no longer as lucrative as it was in the past months for banks to lend to each other and the lenders have resulted to bidding for government securities as demand for loans from the private sector is constrained by high lending rates.