Dropping T-bill rates signal return of cheaper bank loans

The Treasury bill, a major competitor to private lending, has seen its rates come down for the third consecutive week further boosting expectations of lending rates dropping.

This came as the banking industry regulator beamed optimism that loan rates were headed down soon.

“I am confident that we will execute a soft landing of interest rates. The one set of rates that are now pending as they are still up there are commercial rates.

“So I am expressing that optimism — that confidence … that commercial bank rates will fall soon and what do I mean by soon, I am talking of, in the context of the month,” Central Bank governor Patrick Njoroge told Parliamentary Finance Committee Thursday.

Market watchers predict short-term rates will be in single digits in a matter of weeks, marking the beginning of the end of the high-interest rate environment as the Treasury turns down billions offered by banks and other institutions.

In the latest auction, the 182-day T-bill rate declined by 4.21 percentage points to stand at 12.282 per cent while the 364-day paper was down by 3.51 percentage points to 13.62 per cent. In the 91-day paper auction of last week, the rate came down to 13.8 per cent having slid by 5.7 percentage points.

The last time the 182- and 364-day paper were at about 12 and 13 per cent respectively was in August.

READ: T-bill fall signals hope for cheaper loans

Analysts expect rates on Treasury bills to come down to single digits in the next few weeks and banks to divert cheaper money to public lending.

“The rates are coming down quite fast and this is good for the government which intends to borrow from the domestic market. The mwananchi bond (to be sold through mobile money) can’t take off without the rates coming down,” said Joshua Otiende, a research analyst at Nairobi-based ABC Capital.

Mr Otiende said he sees the T-bill rates falling to single digits and helping the State to borrow cheaply.

Dr Njoroge has promised to bring interest rates down gradually, but the current pace has rattled a number of market players, especially bankers’ treasury departments.

Some of the market players fear they will not obtain high enough rates in the primary market should the current trend continue. Banks are the largest holders of the short-term paper whose subscription worth Sh45 billion was rejected this week and Sh106 billion previous week.

The high interest rates have adversely affected the bonds in the secondary bond market since the prices have fallen in recent months, a situation set to reverse.

In general, with the fall in the interbank rates and excess liquidity in their tills, top banks have resorted to bidding low for the T-bills with the recent auctions showing subscription at nearly 400 per cent.

A further fall in the rates of overnight lending among banks is also likely to pressure down T-bill rates lower, says Nairobi-based investment bank Kestrel Capital in its latest analysis of interest rates.

With lower T-bill rates top banks also are likely to start lending again to smaller banks, having stopped such facilities during times of crisis when interest rates had to be pushed up to attract dollars to prop up a weakening currency.

“Given the sharp contraction in T-bill rates and the excess liquidity amongst larger Tier-1 banks, we believe Tier-1 banks could revert to lending at lower rates to non-Tier-1 banks, that is, re-access previously closed funding lines, and to the broader market.

“Failing that, they could be more aggressive in lending to the government, with a corresponding drop in T-bill rates,” said Kestrel Capital.