Rates seen rising in Q1 as State eyes domestic debt

What you need to know:

Interest rates are already rising for the T-bills, with the 91-day paper rate going up from 9.2 per cent to 10.8 per cent this month.
The rate on the 182-day paper has gone up from 10.6 to 12.7 per cent, while that of the one-year bill has risen to 13.2 from 12.2 per cent.
External factors are also pointing to higher interest rates in the coming year, the biggest of which is the increase in the US Federal Reserve rate mid this month.

Interest rates are tipped to rise in the first quarter of this year as the government turns to the domestic market to bridge its budget deficit.

The State is still below target in domestic borrowing for the financial year, which coupled with an increase in existing debt maturities will likely see higher borrowing coming in.

Investors are, therefore, opting for the shortest tenure government debt ahead of the anticipated interest rate increases, looking to have cash in hand to take advantage of the higher rates in the short term.

For bank loan borrowers, rising Treasury bill interest rates may translate into higher loan rates since they are used to calculate the Kenya Banks Reference Rate.

“Since June, the government did not borrow much in net terms from the domestic market, yet we still saw some upward pressure on rates,” said Sterling Capital analyst Eric Munywoki.

“Once they start borrowing in earnest to bridge the budget deficit we are likely to see rates going up, from the first quarter. This could also lead to the central bank rate being revised upwards.”

By the end of November, the Treasury had cumulatively borrowed a net of Sh90.8 billion from the domestic market, having set a borrowing target of Sh229 billion for the whole fiscal year.

This leaves room for borrowing of up to Sh139 billion in the last seven months of the year barring any revision of the target before June, with the budget deficit at nearly Sh600 billion and tax revenues behind target.

READ: Investors demand higher interest for Treasury bills

In the primary treasuries market, investors have been opting heavily for the 91-day Treasury bills as opposed to the 182-day and 364-day options.

The interest rates are already rising for the T-bills, with the 91-day paper rate going up from 9.2 per cent to 10.8 per cent this month. The rate on the 182-day paper has gone up from 10.6 to 12.7 per cent, while that of the one-year bill has risen to 13.2 from 12.2 per cent.

Latest Central Bank of Kenya (CBK) data shows that in the four auctions carried out in December, the three month paper attracted bids worth Sh34.08 billion—with Sh24.02 billion accepted— against the Sh20 billion the government was seeking.

In contrast, the bids on the other denominations of T-bills were below the offered amounts of Sh30 billion each. Investors put in bids of Sh21.7 billion and Sh16.6 billion respectively for the 182-day and 364-day papers.

External factors are also pointing to higher interest rates in this year, the biggest of which is the increase in the US Federal Reserve rate mid this month.

“Yields are likely to face upward pressure particularly in the first quarters as emerging market peers compete to remain competitive despite the rate rise in the US,” said Genghis Capital fixed income analyst Vinita Kotedia.

The US Fed is widely expected to increase the rate again this year starting March, albeit gradually, meaning that the pressure on emerging market central banks to react with rate increases of their own will only rise by the end of quarter one.

The CBK is due to hold its next Monetary Policy Committee meeting this month.