Treasury rejects billions in high-price bids to cut rates

The Treasury has left billions of investor cash on the table taking just a third of the Sh35 billion offered for this month’s two-year bond issue, with traders saying Central Bank of Kenya (CBK) is rejecting high-price bids to contain borrowing costs.

The Treasury was in the market for Sh30 billion in the two-year bond that was on sale between December 2 and 13. Investors put in 775 bids worth Sh35.5 billion, out of which only 481 worth Sh10.5 billion were accepted.

The average rate of the offers by investors stood at 13.07 per cent indicating aggressive bidding, while the rate of the accepted bids stood at 12.5 per cent.

Analysts had projected the rate on the bond to come in at between 12.3 and 13 per cent.

“On the bids, CBK is sending a clear message that they will not accept bullying by the market to accept debt at higher than where the yield curve currently is at.

Notwithstanding the budget deficit, they are keen to get reasonably priced debt considering the players don’t have many options to look out for, bearing in mind bonds seem the only logical source of return for most banks and investment funds,” said NIC Securities fixed-income trader Stanslaus Kimani.

The same pattern was seen in the auctions of Sh12 billion worth of 182-day and 364-day Treasury bills where the government accepted less than the total bids despite the issues being undersubscribed.

Investors offered Sh9 billion for the T-bills, with the government just taking up Sh5.8 billion.

The rate on the six-month paper rose slightly to 10.56 per cent from 10.49 per cent the previous week while the one-year paper rate fell marginally to 11.05 per cent from 11.09 per cent.

READ: Investors earn handsome rate on oversubscribed 10-year Treasury bond

Investors are now likely to redirect the capital left on the table by the Treasury to the secondary market bond auction.

The liquidity in the money market is also likely to be pushed higher going into the New Year by bond maturities worth Sh29 billion due on December 19 that were supposed to be rolled over to a large extent by the just-concluded bond issue.

“The Sh25 billion rejected plus the maturities for the month are likely to get reinvested in the secondary market and thereby push the rates a little lower within the month and until the next issuance in January given the case of too much money chasing a few decent offers,” said Mr Kimani.

Although the government has indicated that it intends to borrow more from the domestic market than the international market, recent shifts in the financial sector mean that it can still reject high pricing on the domestic debt.

Banks have, for instance, been increasing their lending to government after the capping of customer loan rates, while other institutions such as pension funds and insurance firms have had to raise fixed-income investments to counter the drop in returns from equities that are going through a prolonged Bear run.