Sh30bn November bond falls short as liquidity tightens

The November Sh30 billion Treasury bonds became the first issue undersubscribed in 2016, falling short by 23.9 per cent as liquidity in the market tightened and investors held out for better rates.

The low uptake bucked a trend that has seen investors largely opt for the longer-term government paper at the auction, attracted by higher rates compared to those of investments like equities.

This month, the Treasury reopened the 15 and 20-year bond issues for Sh30 billion in total, receiving bids worth Sh22.9 billion from investors. It accepted Sh22.2 billion at 13.6 and 14.3 per cent respectively.

“Liquidity has been a bit tight, seeing a number of major players out of the auction. Equally, the bonds floated are both re-opened issues already held by most players at better levels than yesterday’s outcome (the last sale of the 15 year averaged 14.33 per cent as compared to 13.57 per cent yesterday whereas the 20 year did 14.6 per cent against 14.25 per cent),” said NIC Securities fixed-income dealer Stanslaus Kimani.

“The market (also) expects yields to inch higher therefore a wait-and-see situation made most players stay out or participate minimally. This is informed by the rise in inflation last month, which seems likely to persist into the first quarter of 2017 since food production has been adversely affected by the low rains in 2016 and the increase in fuel and electricity prices.”

The bonds market has proved a success for the government this year, accepting Sh301.1 billion since January against a target of Sh305 billion in primary auctions (excluding tap sales), while the bids by investors have totalled Sh468 billion.

The highest monthly bid was in May, when investors offered the government Sh80.9 billion, of which Sh39.6 billion was taken up.

Analysts also say external factors could also come into play in the bonds market, with yields expected to rise in developed markets and most likely pull markets like Kenya up in tandem.

READ: Sh30bn infrastructure bond bids cause T-bills undersubscription

Genghis Capital said they have seen foreign investors selling out of their infrastructure bond positions in the secondary market as a result of this.

“This seems to be an effect of the current global environment, as yields continue to rise in the developed markets. The rise in global yields is expected to filter through to the local market (sooner rather than later) as pressure on the shilling continues; market participants will be carefully watching the MPC reaction during next week’s meeting to the rapidly shifting global economic environment,” said Genghis in a fixed-income market brief.

In the primary Treasury bills market, demand was level with this week’s 182-day and 364-day offers totalling Sh12 billion to attract bids worth Sh12.25 billion.

Given the convergence in rates, investors were more interested in the six-month paper, with the one-year T-bill undersubscribed with bids worth Sh5.31 billion as opposed to the six month’s Sh6.94 billion.

The rates on these short-term paper rose only slightly compared to last week, by 0.05 percentage points on the 182-day to 10.37 per cent and 0.008 percentage points on the one-year paper to 10.82 per cent.