Treasury bill rates forecast to rise in the weekly auction

Treasury bill rates are expected to continue climbing as the Central Bank of Kenya (CBK) seeks to raise Sh6 billion in this week’s auction.

Last week, yields on the 91-day Treasury bill rose for the sixth consecutive time to 12.001 per cent while 182-day Treasury bill yield stacked another 0.939 percentage points to 12.354.

Higher returns from term auction deposit (weekly deposits at CBK paying at the Central Bank Rate) and repurchase agreements at 15.29 per cent have resulted in low demand for Treasury bills with the weekly auctions attracting a drop in subscriptions.

John Kamunya, head of research at Sterling Capital said that the upward trend is expected to continue until interest rates such as the Central Bank Rate and the interbank lending rate, come to equilibrium.

“There has been a distortion of rates in the market. Treasury bill rates have been ranging between 10 per cent and 13 per cent while the interbank has been ranging around 17 per cent, so what is happening now is a convergence,” said Mr Kamunya.

This week, the banking regulator will be seeking Sh3 billion a piece from the 91 and 182 day Treasury bill auctions but commercial banks which have traditionally held half of the government securities have preferred to invest in term auction deposits and repurchase agreements.

The Central Bank said it sterilised excess liquidity in the money market by mopping up Sh15.7 billion through repurchase agreements and Sh9.7 billion through terms.

This was against repurchase agreement maturities of Sh19.4 billion and term auction deposits maturities of Sh6.5 billion for the period ending July 11.

“Commercial banks have been putting their funds into term auction deposits and the repurchase agreements market where the Central Bank is offering higher returns as compared to T-bills,” said Standard Investment Bank in a research note to investors.

The 91 day Treasury bill yield peaked at 20.799 per cent while the 182 day Treasury bill yield peaked at 20.914 per cent mid-January this year before starting a gradual decent to 9.336 and 10.327 per cent respectively at the end of May this year.

As at the end of last week, the 91 day and the 182 day Treasury bills had added more than two percentage points each.

“Mixed signals are being sent out to the market but they (Treasury bill auctions) have been undersubscribed so it is not very clear,” said Anthony Munyiri, associate director, fixed income securities at Standard Investment Bank.

The banking regulator increased Treasury bill rates to their peak between October last year and January, a move that resulted in an influx of funds into government securities, leading to the strengthening of the Kenyan currency which had dropped to a low of Sh107 to the dollar.

A higher rate will support the shilling.

CBK lowered its benchmark rate to 16.5 per cent from 18 per cent indicating that it wants lower interest rates going forward.