Returns on T-bills fall as lenders raise holdings after rate capping

The returns on government securities have come down by up to a percentage point in two weeks with increased subscription by banks after a new bill capping lending rates was signed into law.

Just two weeks ago, bank holdings of the State securities had fallen but two days after the new law came into effect, the institutions increased their share relative to all other categories of investors ahead of lower lending margins.

According to the September 2 weekly bulletin of the Central Bank of Kenya, commercial banks held 54.4 per cent of all government securities, up from 54.1 per cent in the previous week. Insurers and pension funds fell to 7.3 and 27.0 per cent from 7.4 and 27.2 per cent respectively in the preceding week.

Analysts predicted that the new law would spur demand for Treasury bills.

“The enactment of the Banking Act (Amendment) Bill 2015 is likely to lead to more demand for government securities in the medium term as banks shy away from lending to the more risky sectors of the economy,” said Cytonn Investments in their September 4 report.

The analysts said the rise in, for example, the rate of the 91-day paper took place despite the fiscal pressures that would normally push rates up. The budget deficit for this year stands at an expansionary 9.4 per cent with domestic borrowing alone standing at Sh229.3 billion or 3.1 per cent of gross domestic product.

“The trend for the 91-day paper, however, reversed this week after the signing of the Banking Act (Amendment) Bill, 2015, a probable indicative direction of interest rates in the coming months despite the pressure from government borrowing given the new fiscal year,” said Cytonn Investments.

Stephen Ngunje, a fixed-income trader at AIB Capital, said commercial banks were trying to lock in as much of the government securities when the rates are still high since there were indications that they were on the way down.

“Banks want to lock in the rates that are there now since they are relatively high. The yields are rising because of the higher demand for fixed-income securities and we expect continued fall in the rates,” said Mr Ngunje.

The 182- and the 364-day T-bill subscriptions was higher in the past two weeks relative to the week before the signing of the new law. In the latest auction, the subscription stood at Sh28.9 billion compared to the offer for Sh12 billion.

The rate on the 182-day paper was down for the second consecutive week to 10.943 per cent from 11.1 last week and 11.2 per cent in the previous week. The one-year paper fell to 11.129 per cent from 11.5 per cent last week and 12.0 per cent in the week before.

There has also been higher subscriptions for the 91-day T-bills, with that of September 1 attracting about Sh8 billion although only Sh4 billion was on offer. In the previous week, when the Bill had not been signed, the subscription was less than half.

In terms of actual rates, the 91-day T-bill went down to 8.3 from 8.6 per cent the previous week.

[email protected]