Taxpayers to pay more interest on debt as policy rate hits bonds

Kenyans are headed for more pain as interest rates on new treasuries jumped last week due to tight money supply, a result of raising the policy rate by 300 basis points to 11.5 per cent.

Taxpayers will now pay higher interest costs on government domestic debt, that currently stands at Sh1.42 trillion.

The reopened Sh15 billion five-year infrastructure bond whose sale closed last week only fetched Sh12 billion at an interest rate on accepted bids of 14.27 per cent.

This was more than one percentage point above the accepted bid rate of 13.19 per cent for the previous Treasury bond sold in June.

“This is a typical consequence of squeezing money supply. The investors who are demanding higher interest rates are looking to raise their inflation premium, protecting their capital from higher rates in future,” said ABC capital corporate finance manager Johnson Nderi.

“When you tighten the supply of money, however, the shilling gets value and this in turn lowers the cost of goods thus checking inflation…a win for the monetary policy stance.”

The rates for the Sh8 billion worth of 182 and 364 day Treasury bills auctioned last week also rose by 0.3 and 0.5 percentage points respectively to 12.43 and 13.03 per cent

Investors bid an average of 14.4 per cent for the 182-day and 15.86 per cent for the one-year paper, resulting in only Sh942 million being accepted out of total bids worth Sh1.83 billion in an undersubscribed offer.

Investors in both primary and secondary fixed income markets have been trading with caution as they wait for clearer direction on interest rates, to hedge against high yields cutting bond values.

In its last two meetings in June and July, the Central bank’s Monetary Policy Committee (MPC) has raised to Central Bank Rate, and has slated another meeting for August 5.

The interbank rate has also climbed to 16.4 per cent as a result of the tighter money market. A temporary surge in liquidity had caused the rate to fall to 8.6 per cent two weeks ago.

“Liquidity conditions may improve marginally in the first half of August supported by a larger number of redemptions of government securities.

Poor investor sentiments as well as subdued trading levels in the secondary market are likely to place further upward pressure on yields across the board,” said Genghis Capital fixed income analyst Vinita Kotedia in a July markets update.

The MPC has been primarily concerned with keeping inflation in check, with the cost of living having risen month on month to 7.03 per cent in June from 6.87 per cent in May.