Investors in government securities have stuck to buying Treasury bills over bonds despite falling interest rates, signaling caution over the direction of rates amid government funding pressures.
Subscriptions to Treasury bills have remained outsized compared to the uptake of bonds even as the long-term papers offer an opportunity to lock in higher returns for longer.
The total domestic debt subscription increased by 127.9 percent to Sh361.2 billion in October from Sh158.4 billion in September largely on a significant spike in the demand for T-bills.
In contrast, subscriptions to the reopened 10-year bonds stood at a modest Sh33 billion from a Sh25 billion target, representing a performance rate of 132.19 percent.
Analysts at Sterling Capital note investors remain wary of holding long-term bonds from uncertainty surrounding the government’s current fiscal position.
“Under ordinary circumstances, a reduction in benchmark rates would prompt investors to begin lengthening duration by buying long-term bonds that surpass their ideal holding period in a bid to realise higher returns from selling said bonds prior to maturity,” the analysts said in a fixed income note.
“For example, an investor seeking a two-year government paper would instead buy a three-year bond and sell it after two years to generate a higher return. This phenomenon is commonly known as riding the yield curve. In our bond market however, investors have remained wary of the lengthening duration in consideration of a perception of the government’s dire fiscal situation.”
Interest rates on Treasury bills have fallen for 15 straight weeks, nudged by the lowering of the Central Bank of Kenya (CBK) benchmark interest rate in August and October.
Interest rates on the 91-day, 182-day and 364-day papers settled at 13.4496, 13.84 and 14.4476 percent respectively at last week’s auction.
The CBK has meanwhile restricted itself to re-opening long-term bonds to avoid paying higher interest rates to investors for an extended period.
Jitters on government financing are linked to revenue under performance which commenced with the rejection of the Finance Bill, 2024 creating an estimated shortfall of Sh344.3 billion to the exchequer.
The underperformance of government receipts through the first quarter of the 2024/25 financial year has also increased the chances of the exchequer raising its net domestic financing target to June 2025 to cover for shortfalls.
Spending pressures, including carryover expenditures from the 2023/24 fiscal year, have raised the prospect of a wider fiscal deficit with the National Treasury expected to deliver a second supplementary budget by the end of January 2025, increasing overall expenditures in the fiscal year.
The exchequer has nevertheless sought to raise at least Sh138 billion from new taxes under the Tax Laws (Amendment) Bill, 2024 which includes the extension of a tax amnesty to June 2025 and higher excise duty for wines, spirits and cigarettes.
Interest rates on Treasury bills are still widely expected to decline amid the jitters on government financing with the CBK being primed to continue cutting its benchmark rate into 2025.
