T-bond rates rise signals return of expensive credit
The Central Bank of Kenya headquarters in Nairobi. PHOTO | FILE
The interest rate on the 10-year bond issued this month hit 16.1 per cent beckoning more expensive credit even as the Central Bank of Kenya (CBK) left the base lending rates untouched in Wednesday’s MPC meeting.
The 182-day and 364-day Treasury bill issues this week also saw yields climb yet again, by 0.46 and 0.58 percentage points respectively to 14.1 and 14.9 per cent.
The willingness by the government to pay a premium on both the short- and longer-term debt also signals need to have the heavy January maturities for bonds and bills rolled over as it plugs a wide budget deficit.
Other than individual loan borrowers, the rise in government securities’ rates will see companies looking to borrow pay a higher premium as most corporate bonds are priced using government bonds.
“It is clear to the market the government’s debt maturity structure is placing upside pressure on interest rates. Large maturities of government T- bills and bonds are prompting the market to place higher bids at auctions and most investors would prefer to invest in shorter duration debt in order to avoid mark-to-market losses,” said CfC Stanbic economist Jibran Qureishi.
“Naturally, corporates looking to issue debt may have to shelve their plans for now and wait for some stability in rates before coming to the market.”
Interest rates could come down later in the year however due to reduced inflationary pressure and a stable currency.
The government managed to raise Sh24.1 billion out of the targeted Sh35 billion from the two- and ten-year bonds issue in last Tuesdays auction. Investors pumped heavily into the two-year bond, to the tune of Sh20.15 billion.
The government however left on the table Sh12.2 billion having received total bids worth Sh36.3 billion.
Bank loan borrowers will be keen going forward to see whether the lenders will revise lending rates upwards in reaction to the rising government securities’ rates.
The CBK gave a signal to the market that it expects them to hold off from raising interest rates when it maintained both the base rate at 11.5 per cent and the Kenya Banks Reference Rate at 9.87 per cent on Wednesday.
Mr Qureishi said however that the Central Bank Rate (CBR) has typically been dislocated from other short-term interest rates as seen towards the end of last year.
“Thus, money market rates can deviate from time to time without the CBR adjusting. The government ought to provide a signal to the market that they are willing to consolidate in order to taper the rise in rates,” he said.
The other option for government remains external borrowing, which according to the budget statement of last June was supposed to plug more than half of the deficit.
Analysts have however called into doubt the viability of foreign borrowing in the short term due to unfavourable conditions in terms of cost.
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