Cost of public debt drops with fall in T-bill rates
The Treasury building in Nairobi. Interest rates on government securities have declined, setting stage for possible increase in lending to the private sector. FILE
What you need to know:
The falling interest rates on government papers could spur lending to the private sector by making it less lucrative for banks to give loans to the Treasury.
Interest rates on Treasury bills and bonds have trended downwards in recent months as market liquidity increased and also in reaction to the CBK's cut of its policy rate to a two-year low of 8.5 per cent.
Interest rates on government securities have come down by two to three percentage points in the past two months, cutting the cost of public debt but leaving the average bank lending rates unchanged.
The falling interest rates on government papers could spur lending to the private sector by making it less lucrative for banks to give loans to the Treasury.
Borrowers are however yet to benefit substantially from the falling interest rates, as the average cost of loans remains stuck at about 18 per cent, which is more than double the Central Bank’s indicative rate of 8.5 per cent.
“The coming down of T-bills and bonds only represents the government’s appetite for cash and is not related to the lending rates. The rates on government paper are coming down, but only when they are accompanied by a fall in deposit rates will the lending rates also come down,” said Habil Olaka, the chief executive of industry lobby Kenya Bankers Association.
Interest rates on Treasury bills and bonds have trended downwards in recent months as market liquidity increased and also in reaction to the Central Bank’s cut of its policy rate to a two-year low of 8.5 per cent.
In last week’s auctions, the 91-day Treasury bill rate dropped to 7.57 per cent from 10.54 per cent in early April, while the six-month paper was down to 8.84 per cent from 10.89 per cent in the same month.
The one-year bill was down to 9.38 per cent from 12.62 per cent in early April — shaving off about three percentage points. The average interest rate on deposits, the banks’ main source of funds, has also come down but only to 6.4 per cent from 6.8 per cent last November.
Since January they have remained stagnant at about 6.4 to 6.5 per cent. Banks make money by maximising on the margin between lending rates and returns paid to deposits, known in banking lingo as interest rate spread.
“We expect to see deposit rates coming down in line with the general trend on interest rates going forward,” said Mr Olaka. “This should then impact on the lending rates. But until the deposit rates change, you should not expect the rate on government securities to affect lending rates.”
On the long-term end of government papers, the 20-year bond was down to 12.43 per cent in Thursday’s trading at the Nairobi Securities Exchange.
In the interbank market, which is the largest source of short-term funds for commercial banks, the rates have come down to just above seven per cent from 8.4 per cent at the end of March this year.
Bond dealers said the yields on long-term fixed income paper had fallen because banks had a lot of cash in their hands as shown by the huge amounts they were taking to the auctions for the gilt-edged securities.
“The ample liquidity in the market has helped bring down bond yields. We are already trading the 20-year paper that was recently floated and it is down by 60 basis points to 12.1 per cent,” said a fixed-income securities dealer who declined to be quoted because he had already taken a position on the 20-year bond.
The dealer said while bonds yields had declined in line with the lower CBK policy rate and the declining T-bills, there was still a lot of appetite for the papers from investors.
“The yields are down but we don’t know where they will stabilise,” he added.
