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Investors, CBK tussle over direction of interest rates
Investors offered the government a total of Sh50.6 billion in the sale, out of which the CBK accepted Sh42.5 billion, rejecting the balance on cost concerns
Investors pushed back against Central Bank of Kenya (CBK) efforts to bring interest rates on government debt lower in last week’s Treasury bills and bond auctions, with an eye on the recent increase in the Treasury’s domestic borrowing target.
The sale of a reopened 25-year Treasury bond which closed on Wednesday saw investors ask for a return of 13.94 percent on average, which was higher than the bond’s actual interest rate (coupon) of 13.4 percent.
The CBK therefore offered a price discount of Sh2.72 per unit of Sh100 on the bond, in order to make up for the difference between the yield and coupon rates. This was despite the bond being oversubscribed with bids of Sh47 billion against a target of Sh25 billion.
The CBK took up Sh35.2 billion in the sale, leaving Sh11.8 billion on the table.
“The CBK continues to tame aggressive bidding to lower borrowing costs despite the government’s high budget financing requirements as shown in the recently announced supplementary budget II,” said analysts at Sterling Capital in a note on the bond.
On the Treasury bills auction, investors majorly went for the 91-day paper for a second straight week, indicating uncertainty over the direction of interest rates in the short term.
This is a departure from previous sales where they were opting for the one-year paper in order to lock in its higher rate on expectations of lower rates later in the year.
Investors offered the government a total of Sh50.6 billion in the sale, out of which the CBK accepted Sh42.5 billion, rejecting the balance on cost concerns. The 91-day paper accounted for Sh23.9 billion of the accepted bids, followed by the 364-day at Sh11.4 billion, and the 182-day T-bill at Sh7.2 billion.
The push by investors against lower returns on government securities comes following the revision of the domestic borrowing target for the current fiscal year from Sh413 billion to Sh593.7 billion.
The adjustment was done after the tax collection projection was revised down by Sh51 billion to Sh2.58 trillion, which alongside higher expenditure of Sh86 billion has caused the fiscal deficit to expand from Sh768.8 billion to Sh864 billion.
With the revision expected to put pressure on the CBK to borrow more from the domestic market —and pay higher returns— the Treasury opted to partially refinance some of the maturities due in April and May using a bond buyback of Sh50 billion, which was done in mid-February.
