Short-term rates converge as 91-day Treasury bill rises

The oversubscription of short-term securities during the last auctions is being read by analysts as response to convergence of money markets’ short-end rates, improved yields and liquidity.

Results of last week auctions show that the Central Bank received bids worth Sh4.2 billion against a Sh3 billion offer for the 91-day bills compared to previous Sh1.3 billion bids. Treasury rejected Sh1.3 billion.

The longer-term 182 day paper attracted bids worth Sh2.16 billion against the Sh3 billion bills offered compared to previous Sh1.2 billion bid. Treasury accepted bids worth Sh1.69 billion or double previous week’s Sh869 million.

The improved subscription was attributed to higher rates, which compared favourably with other investment options, especially those available to lenders which are major takers of government securities.

“There was a good improvement. It is a sign that the market is finding equilibrium; that the price is at a level people are willing to participate,” said Mr Alex Muiruri, a fixed income dealer at African Alliance.

The 91-day rate rose to 12.9 per cent from 12.001 while the 182-day paper rose to 12.8 per cent from last week’s 12.3 per cent with analysts saying that they expected the rates to continue on an upward trend till it converged with other market rates.

Treasury bill returns have been lower than the rate banks lend to each other at — interbank rate and repurchase agreement (Repo) rates — which have been receiving more investment funds from financial institutions that are the major players in the money market.

Though the Central Bank of Kenya (CBK) reduced its indicative rate, CBR, it has continued to be active in the money market with Repos, a move that has been blamed for distorting the market through competing with other money markets’ instruments.

Lowering of CBR to 16.5 per cent from 18 per cent was expected to result in more liquidity in the market leading to lower rates; however, the reverse is true with government security yields rising in the eighth auction in a row.

“Increased liquidity would reduce interest rates but there has been a distortion in the market,” said John Kamunya, an independent analyst.

CBK is paying 14.5 per cent for a seven-day Repo and 14.3 per cent for 14 days, both higher than the Treasury rates.