CBK reverses direction of short-term interest rates

Interest rates on government debt last week rose for the first time in 14 months, pointing to rising competition for deposits with the return of private borrowers to the money markets.

Weekly Treasury bill auction results showed that the Central Bank raised the interest rate on the 91-day paper by 30 basis points to 1.9 per cent to get the Sh4 billion it needed from that offer.

The move came after nearly four weeks of a steady decline in investor participation and two successive undersubscriptions of the 182-day Treasury bills.

The CBK last raised the yield on the 91-day Treasury bill in June last year when it moved it from 7.05 per cent to 7.18 per cent in the next auction.

During the latest auction, the CBK received bids worth Sh4.6 billion — a 115 per cent subscription rate — indicating that low investor participation is beginning to pile pressure on interest rates.

Fixed income securities traders, however, said that a tightening of liquidity among commercial banks – the biggest buyers of government securities — and a reluctance by the Central Bank to tackle it is the main driver of the interest rates movement.

“One or two banks seem to be sitting on huge amounts of cash causing a liquidity problem,” said a senior bond trader who did not want to be named.

That has left the CBK juggling between raising funds at a reasonable cost and making government debt attractive to investors without signalling that interest rates should rise.

The real test for the CBK is, however, expected to come in the next few weeks with the rollout of the government’s largest fund raising initiative — a Sh31 billion infrastructure bond — that is coming to the market at a time when corporate borrowing and fundraising initiatives are rising against the backdrop of tightening liquidity.

In recent months, the government’s ability to pick whose money to accept has substantially pulled down the market’s indicative rate with the banks following in tow with a cut in deposit rates.

Last month, the Central Bank slashed its benchmark lending rate by 75 basis points to six per cent, aiming to defuse fears that yields, especially on short term government paper, were set to rise.

The CBK has remained on an expansionary monetary policy path for nearly two years, pumping liquidity into the market and pulling down Treasury bill yields in an attempt to bring down lending rates that averaged 15 per cent in June.

Many traders felt the yield curve on securities had bottomed out and were looking to the CBK for a commitment that it will stay on the low rates path.

“Should liquidity tighten further, we may see the CBK coming in with an injection of cash as a show of commitment to the low interest rates regime,” fixed income security analysts at Sterling Investment Bank said.

“In this regard, we expect rates to stabilize in the short term.”