February bond underperforms, investors go for T-bills


A screenshot of the M-akiba mobile traded bond

The government raised just a third of its targeted Sh50 billion in the February Treasury bond sale, with investors instead preferring to pump funds into short-term Treasury bills on expectations that interest rates will soon go up in the country.

The bond, a dual tranche offering comprising a reopened 10-year paper first sold in 2017 and a new 10-year paper, was undersubscribed despite offering interest rates of 13.87 percent and 14.15 percent respectively.

The bond raised Sh16.74 billion for the government, which has been playing catch-up in its domestic borrowing programme for the current fiscal year that is targeting a net of Sh550.9 billion.

Investors instead oversubscribed by a wide margin the last three Treasury bill auctions which coincided with the bond sale period, offering a total of Sh114 billion in bids against the targeted Sh72 billion (Sh24 billion weekly).

They have, therefore, been effectively parking their funds in the short dated papers in anticipation of interest rates going up in the near term due to government appetite for debt and persistently high inflation.

“As per expectations, the issues were undersubscribed. This we attribute to investor capital allocation to short-term debt securities, particularly the 91- Day T-bill, given expectations of rising interest rates,” said city-based investment bank Sterling Capital in a note on the bond sale.

The analysts reckon that investors are alive to the government’s strained fiscal position where revenue performance and borrowing are trailing target, while efforts to cut spending are hampered by factors such as drought and debt obligations.

This has seen bolder demands for higher rates in the securities auctions, going against the aversion by the Central Bank of Kenya (CBK) against high priced bids that raise the cost of servicing domestic debt.

The preference for Treasury bills also poses a problem for the Treasury’s efforts to keep lengthening the debt maturity profile of the country in order to avoid short-term refinancing risk.

Issuances of longer dated bonds and minimising the borrowing through T-bills in the last three years has seen their share of government debt drop to 14.9 percent from highs of 34 percent in June 2019.

The Treasury has responded by revising the targets of both domestic and external borrowing for the year to reflect both the rising difficulties in accessing long-term funds from local lenders and easing of credit conditions externally where asking yields for sovereign bonds have dropped significantly.

In the 2023 draft Budget Policy Statement, the Treasury revised downwards the net domestic borrowing target for the 2022/2023 fiscal year from Sh582.2 billion to Sh550.9 billion, while raising the net target for external borrowing to Sh298.4 billion from Sh280.7 billion.

The new targets also reflect the Sh13.6 billion downward revision of the fiscal deficit to Sh849.3 billion as a result of development budget cuts.

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