Kenyan investors have put Sh312 billion in short-term government securities this year, pointing to an expectation that interest rates will rise amid high State demand for loans to fill in its budget deficit.
The reluctance by investors to commit their funds to long-term papers is allowing them the flexibility to take advantage of a rise in rates, which would be difficult with long-dated bonds.
Since the beginning of the year, the most popular security has been the three-month Treasury bill, which has seen an uptake of Sh169.2 billion in just 10 auctions.
This averages out at Sh16.9 billion per sale, which is more than four times the weekly government target of Sh4 billion from this tranche of T-bill.
The 182-day and 364-day Treasury bills have on the other hand been attracting much lower demand, realising Sh84.5 billion and Sh54 billion respectively in the period.
The State normally seeks Sh10 billion from each of these two longer-dated T-bills every week, meaning that the one-year tranche has underperformed against the target.
Following last week’s auction, when the 91-day paper accounted for half of the Sh32.2 billion the State raised from the sale, which analysts at Genghis Capital attributed to this preference by investors to remain near liquid in the market.
“The 91-day T-Bill registered an oversubscription in the week – signalling the continual investor preference for near-cash securities,” said Genghis Capital.
For the Treasury, the high demand for the 91-day T-bill threatens to introduce refinancing risk in the short term when the billions come due.
The government has also been pushing hard to lengthen the maturity profile of domestic debt by prioritising longer-dated bonds and reducing the use of Treasury bills in budget financing.
The current share of T-bills as a percentage of issued government debt stands at 14.8 percent, having been brought down from a high of 34 percent in June 2019.
For the bonds market, a number of recent issuances have failed to hit the targeted amount, forcing the CBK to adjust upwards the rates it is willing to accept on bids to attract enough takers.
The most recent sale of a 17-year infrastructure bond which had targeted Sh50 billion realised investor bids worth Sh59.77 billion, out of which the government took up Sh50.88 billion.
The average rate of the accepted bids was 14.39 percent, a record for an infrastructure bond and now the highest net return on offer on an outstanding government bond.
Infrastructure bonds are typically oversubscribed due to their tax-free status. Interest income on other government bonds is taxed at a rate of between 10 percent and 15 percent, depending on duration.