Interest rates on Treasury bonds drop as CBK rejects high bidders

Rates on government securities have continued to fall as the Central Bank rejects aggressively priced bids, with the highly liquid market also helping tame the interest rate.

The interest rates on the 91-, 182- and 364-day Treasury bills fell by between 0.4 and 0.7 percentage points apiece during last week’s auctions, the fourth straight week of rate declines.

The CBK accepted only 24 per cent of the Sh13.74 billion worth of offers made on the Sh4 billion 91-day T-bill issue last week, at an average rate of 10.84 per cent.

On the Sh6 billion 182-day paper, the CBK took up 30.3 per cent of the Sh21.69 billion offered by investors, at 13.25 per cent, but took up Sh9.18 billion out of the Sh9.68 billion worth of bids on offer on the 364-day paper.

“The high subscription levels is an indication of high liquidity in the market. The CBK accepted more of the long-term cash on the 364-day than 182-day…the high liquidity comes from maturity redemption and inflows from foreign investors who continue to look for high return,” said Sterling Capital in a market note.

The February Treasury bond offer — comprising five and 10-year re-opened bonds worth Sh25 billion — has set coupon rates that are significantly below the accepted rate of bonds issued last month, indicating that the CBK expects investors to bid lower this time round.

READ: CBK to sell five and 10-year Treasury bonds

In January, the Treasury sold through CBK two-year and 10-year bonds worth Sh35 billion, attracting bids worth Sh36.33 billion out of which Sh24.14 billion was taken up at 15.8 and 16.1 per cent respectively for the two and 10-year bonds.

The success of this renewed push against rising rates will however be tested during the current bond sale. The 10-year bond issued last month carried a coupon of 12.37 per cent.

The move by the CBK to curb its appetite for expensive money has been seen as a key factor in arresting the upward drive of interest rates on treasuries that was beginning to concern the market due to the knock-on effect on the already high bank lending rates.

“Another factor which has promoted a down [ward movement] in interest rates is a high volume of government securities redemption which are scheduled in the first quarter. This has promoted increased liquidity in the money market, and is effectively beginning to manage the aggressive investor bidding nature that we have experienced over the last few weeks,” said Genghis Capital fixed income analyst Vinita Kotedia.

The downward revision of the domestic borrowing target by Sh53.3 billion to Sh168 billion has helped to take off pressure to accept expensive money.