Market faces tighter liquidity as investors focus on Sh25bn bond
The shilling is the likely beneficiary of a tightening market. PHOTO | FILE
What you need to know:
The high liquidity in the money markets is expected to tighten as investors buy the infrastructure bond worth Sh25 billion.
Investors have now shifted focus to the 12-year amortised bond that has gone into auction this week.
The Kenyan financial markets have been swamped with cash in the past one month with most of the offers for government securities oversubscribed by huge margins.
According to Central Bank of Kenya (CBK), the liquidity has been sustained in recent weeks by government payments and maturities of some securities held by the monetary authority including repurchasing agreements (repos) and Term Auction Deposits (TAD). Repos and TADs are used by the CBK to mop up excess cash from the money market.
The primary Treasury bill sales over the past four auction sessions have yielded oversubscriptions, especially on the 364-day issue.
The one-year issue has seen bids worth a total of Sh46.24 billion since the last week of February, against issues worth Sh15 billion, a subscription rate of 308 per cent. The latest yield on this paper is 10.6 per cent.
On the 182-day Treasury bill, the government has sought a total of Sh12 billion in the past four auctions, receiving bids worth Sh21.99 billion which is a 183 per cent subscription rate, with the paper’s yield now at 10.3 per cent.
In three auctions up to March 12 seeking total of Sh4 billion, the 91-day T-Bill attracted bids worth Sh9.9 billion, with the latest interest rate of 8.6 per cent.
The high liquidity in the money markets is, however, expected to tighten as investors buy the infrastructure bond worth Sh25 billion. Investors have now shifted focus to the 12-year amortised bond that has gone into auction this week.
Also likely to contribute to withdrawal of liquidity from the market is the CBK mop-ups through sale of repo and TADs under open market operations, tax remittances and the net payments for government securities in the primary market.
“There are good inflows coming from the offshore, with the investors selling dollars to buy the infrastructure bond. Liquidity is getting tighter therefore, and we may see the bids on the primary issues coming down,” said Commercial Bank of Africa dealer John Njenga.
The shilling is the likely beneficiary of a tightening market, which would be a timely boost given that the currency had slipped below the Sh92 level to the dollar on at the beginning of this week.
Money market analysts attribute the slide in the currency exchange rate to declining earnings from tea inflows as the dry season persists, coupled with the continued global rally on the dollar as well as the increased supply of the local currency in the market.
Demand for dollars from the energy sector also helped put the shilling under pressure.
CBK has attempted to stabilised the currency by selling dollars to the market from Monday when the shilling touched a low of 92.30/40.
The shilling however strengthened on Friday to exchange at an average of 91.80/90 as quoted by commercial banks. The CBK’s mean indicative rate was 91.88 from the low of 92.05 indicated on Wednesday.
To minimise liquidity, the CBK has been active in the market lately. On Wednesday, the monetary authority went to the money markets to mop up Sh9 billion in excess liquidity using repurchase agreements and term auction deposits.
Earlier in the week on Tuesday, the CBK had indicated plans to mop up Sh10 billion in excess liquidity from the money markets using the same instruments.
The mop-ups were intended to make it more costly to hold dollars, a move that makes the greenback available in the market thereby supporting the shilling.
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