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Diaspora bond falls short of target amid investor uncertainty
Thika Superhighway project works in progress. The government issue of a 12-year diaspora infrastructure bond has so far raised Sh13.3 billion of the Sh20 billion target on investors fears over the direction of interest rates. File
Uncertainty over the direction of interest rates has seen the inaugural diaspora infrastructure bond suffer an under-subscription for the first time since Treasury started selling securities to finance projects.
The government issued a 12-year infrastructure bond targeting Sh20 billion, but only managed to get bids worth Sh13.3 billion or 66 per cent of the amount. It accepted Sh11.6 billion from the bids at a weighted average market rate of 16.64 per cent, against a coupon rate of 12 per cent.
The yield on the bond is also the highest rate on infrastructure bonds so far. Two infrastructure bonds of similar maturity issued in 2009 were sold at between 12 and 12.5 per cent.
Dealers said uncertainty about the direction of interest rates was the biggest cause of the under-subscription.
“Many investors decided not to proceed (in buying bonds) and are waiting to see where rates will go,” said Kenya Bond Traders Association chairman Fred Mweni.
The 91-day Treasury bill sold at 13.19 per cent up from 2.41 per cent in January.
Investors appear to be keen to avoid losses given that increase in interest rates leads to a drop in values of the fixed income securities.
Tight liquidity and inflation fears fuelled further the under-subscription.
“Some investors would want to adopt a ‘wait-and-see’ strategy as there was a lot of uncertainty on the yields because of the low liquidity in the market and recent bidding trends for both short term dated treasury bills and bonds,” said Renaldo DeSouza, a research analyst at Genghis Capital.
The latest infrastructure bond offer also introduced “tap sales”, which allows the issuer, in this case the government, to sell the bond for an extended period after the auction, which is subject its funding needs.
This is partly done to encourage investors, especially those at the retail end, to buy the bond at a later date.
Sale of the infrastructure bond remains open up to February 3, 2012.
Mr Mweni said that as investors wait to see the direction interest rates take, the likely scenario is that as the fear rises buyers would ask for a higher return on the same bond, making it more expensive for the government to borrow.
While tap selling is meant to encourage retail investors to participate, it may have contributed to the under-subscription as retail investors take advantage of the provision to buy time to monitor the interest rates before deciding on whether to buy, said analysts at Genghis Capital.
Johnson Nderi, a research analyst at Suntra Investment Bank, said that the under-subscription was not a surprise due to tight market liquidity and high inflation rates. “Investors’ disposable incomes have tightened,” he said.
Inflation rose to 17.32 per cent in September from 16.67 per cent in August. Investors, they said, would prefer to put money in short-term instruments such as Treasury bills.
