Interest rates on government bonds on the rise again

With 129 basis points above the coupon rate, the yield was higher than what the Treasury or the Central Bank expected.

Interest rates go up on reports of higher inflation due to imported higher prices of goods.

In a recent interview, British Airways CEO Willy Walsh said he expected long-term prices of crude oil to be at $100 a barrel.

Prices of some foods such as wheat have also raised the prospect of higher inflation therefore causing many investors to factor inflation in their expectations for the future.

CBK has been trying to contain the rise, rejecting some of the money offered at the auction.

The price of the bond was set at Sh92.916, a Sh7-discount from the par price of Sh100.

The rejection of some of the quotes from investors indicated the determination attempt, in recent times, by the state to reduce its interest payments on public debt.

The Central Bank of Kenya had earlier indicated that it expected full take-up of the bond, noting that the coupon was very close to the market expectations, although it later said that the market is demanding a premium for putting its money with the government for years.

Public sector

Growth of loans had taken place also on the private as well as the public sector fronts – although there has been a bigger growth in the latter.

The private sector credit in the year to May 2010 grew by 17.3 per cent while credit to government grew 60 per cent in the same period.

Many a time, when one is growing the other shrinks – as one tends to crowd out the other.

“There used to be an inverse relationship between private and public sector credit but now the current policy has created a conflict where both are being expanded simultaneously. This may be the reason why growth of private sector credit may not be hitting the correct targets,” said Mr Muiruri.