Lower bond price leaves mixed signals in market

The Central Bank has shrugged off a recent decline of investor interest in government debt to price the latest issue of infrastructure bond at six per cent, making it the largest and cheapest bond ever in the market.

The Sh31 billion nine-year bond, which comes with a three per cent discount for early exit, marked yet another signal of the CBK’s preference for lower lending rates and is expected to become the benchmark for upcoming corporate bond issues in the coming months.

By pricing the bond at six per cent, the CBK is hoping that the latest offer will renew investor interest in government paper after nearly four weeks of waning take up even as it leaves room for the state to raise cheap cash to finance its budget.

Success of the government’s largest fund raising initiative will however depend on the level of liquidity in the market and the existence of attractive options in the near term.

Discount and interest payments for the nine-year amortized bond, with a 6.0 per cent coupon are tax exempt.

And at six per cent, the latest infrastructure bond is priced at half the 12.5 per cent rate that the government offered buyers of a similar bond last year.

Tax exemptions that come with the infrastructure bond are expected to add a sweetener to the offer but the jury is still out as to whether investors will be willing to pump cash into the bond or hold on to it in wait for upcoming corporate issues.

The deep cut in the pricing of the bond comes after nearly a month-long steady decline in subscription rate for government paper that dropped to a new low in the run up to last week’s vote.

The government’s ability to cherry-pick whose money to accept in the first six months of the year has pulled down the market’s indicative rate substantially, forcing the banks to respond with cuts in deposit and lending rates.

CBK data, however, shows that in the past four weeks, investors have been showing signs of low yields fatigue and have slowed their participation in debt paper auctions — causing a steady decline in the volume of subscriptions.

The government attained a 61 per cent or Sh3.6 billion subscription rate for the 182-day Treasury bill against a target of Sh6 billion during last week’s auction – the first under subscription in 20 months.

Investor interest in the 91-day T-bill was much better at 101 per cent subscription rate that netted Sh5.1 billion against a target of Sh5 billion.

The take-up rate was however less than half the 338 per cent realised in the first week of June.

These low yields for short and medium term securities are expected to make lending to government less attractive for commercial banks intensify the drive for private sector and household lending where the returns are much higher.