CBK move raises T-bill rates after steady five-month drop

The government’s cost of borrowing through treasury bills has gone up for the first time in five months, as buyers of the securities turned to higher yielding investment options and a day after the Central Bank signalled its preference for higher interest rates.

In this week’s auction the 182-day Treasury bill rate rose to 10.75 per cent from 10.32 per cent in the previous auction, while the longer tenure 364-day T-bill halted its downward trend to hold at 12.43 per cent.

Investors have been turning to the higher yielding stock market and repurchase agreements following a steady drop in the Treasury bill rates which peaked in mid January.

“Investors (are) moving away from the low yielding paper into the equities market which is up 13.4 per cent to date,” said Standard Investment Bank.

The Central Bank of Kenya maintained the policy lending rate at 18 per cent on Tuesday, showing preference for high interest rates intended to support the shilling by attracting foreign investors.

The government intended to raise Sh2 billion through the 364-day Treasury bills but received bids of only Sh42.6 million. Analysts said the low subscription rate indicated poor participation by institutional investors who are usually quick to move their money for better bargains.

The Central Bank has also been relying heavily on repurchase agreements, commonly referred to as Repos, to mop up liquidity in the market in a bid to support the shilling at rates of 17.7 per cent. The regulator has mopped up a total of 154.4 billion shillings via repos this year.The rate at which banks lend to each other, inter-bank rate, has also been higher than the government securities at 16.6 per cent, making it more attractive market to commercial banks with excess liquidity. “The liquidity in the market is distorted with some players preferring the interbank and Repo markets hence the ensuing muddle in interest rates” said Mr John Kamunya a market analyst.

In its policy statement the Central Bank said there was still excess liquidity in the market, forcing it to retain its indicative rate at 18 per cent and introduce longer tenor term auction deposits as liquidity mop up tool. The term deposits are however seen to potentially dampen investor appetite for treasury bills as they are expected to yield higher returns. “Treasury bills could face lower demand after the central bank introduced longer term repurchase agreements to mop up excess liquidity from the market,” said Standard Investment Bank.

Government securities had risen steadily last year to peak in mid-January as the central bank tightened monetary policy in efforts to check the cost of living .