The International Monetary Fund (IMF) has doubled down on its stance on paying out higher interest rates to investors in government securities to incentivise investor subscriptions.
In a new report, the fund has signalled that smaller increases in rates for medium to long-term bonds contributed to difficulties in the government’s net domestic financing programme for the 2022/23 financial year.
This is as investors switched to shorter dated securities represented by Treasury bills whose yields have increased by a faster rate in contrast.
“Treasury bill rates have gone up further but smaller increases in long-term domestic bond rates contributed to the government's net domestic financing challenges as demand shifted to the shorter end of the yield curve, raising rollover needs,” said the IMF.
According to an analysis by the fund, interest rates on T-bills rose by between 2.05 percent and 4.04 percent between the end of May and June 23.
In contrast, yields for two to five year bonds rose by between two percent and 2.55 percent while bonds timed at between six and 10 years saw their return rise by 1.2 to 2.05 percent.
Bonds with longer maturities meanwhile, had yields move up by a narrower range of 0.59 and 1.14 percent respectively.
The slower adjustments in returns on longer dated bonds has coincided with the Treasury's avoidance of long-term securities to avoid locking in high interest rates for many years.
The Central Bank of Kenya recently closed the sale of a new five-year bond, which set an interest rate of nearly 17 percent while yields on the shorter timed T-bills are slowly edging towards 13 percent.
In the opening half of 2023, the average time to maturity for issued Treasury bonds stood at 7.4 years in contrast with a tenure of 12.9 years in a similar period in 2022.
The new IMF report reinforces the global lender’s view on government’s domestic financing where the institution previously backed higher returns to entice Treasury bond investors.
While on a country visit, IMF Managing Director Kristalina Georgieva said higher returns on bonds could help the exchequer meet its domestic financing needs.
“If the shilling is artificially held high, that suffocates the domestic market. Likewise, if you keep the reward for bondholders artificially low, what happens is you are likely to run out of money when you don’t have access to external financing,” she said.
