The interest rate on the shortest government paper, the 91-day Treasury bill, has risen above 10 percent in the latest auction, signalling the pressure to re-price various assets including loans and fixed bank deposits.
The average interest rate for the security reached 10.004 percent in this week’s auction, up from 9.907 percent previously.
Yields on all three short-term papers now stand at double digits with the average interest rate on the 182-day and the 364-day paper at 10.368 and 10.857 percent respectively.
“We are in a rising interest rate environment and as such, many people want to hedge against duration risks. We are also seeing a lot of investors aggressively bidding, knowing there is pressure on the exchequer to be accommodative to higher interest rates given its pressing financing needs,” analysts at Sterling Capital stated.
The 364-day paper had in November surpassed the 10 percent mark with investors earning the highest return from the paper since January 2019.
T-bills have recorded strong subscriptions in recent auctions, drawing more bids than long-term government bonds.
This week’s T-bill auction, for instance, saw a 643.29 performance rate for the 91-day paper which saw bids received at Sh25.73 billion against just Sh4 billion in the amount offered.
The Central Bank of Kenya (CBK) has been forced to accommodate more aggressive investor bids to encourage subscriptions, especially for long-term debt instruments.
For instance, the CBK accepted nearly the entire sum of Sh25.73 91-day paper subscriptions with the total amount accepted at Sh25.67 billion.
The CBK is expected to be under more pressure to make acceptances of expensive bids on the short maturing paper as it faces maturities of Sh34 billion in next week’s T-bill auction.
Analysts at Sterling Capital have advised clients to favour the short-term securities owing to the volatile interest rates environment.
This will give them the option to buy more lucrative papers such as tax-free infrastructure bonds when they are offered by the government’s fiscal agent, the investment bank said.
Interest rates first rose rapidly on long-term government bonds starting last year but the trend has now spread to T-bills.
The overall jump in interest rates is driven by high inflation, government borrowing to fund the budget as well as the weakening of the shilling.