Investors pumping tens of billions in Treasury bills and bonds are reeling after returns on government plunged in one of the worst route in recent years.
Interest rates on Treasury bills have fallen by between 5.1 and 6.6 percentage points since the beginning of October, reacting to the Central Bank of Kenya (CBK) cutting its benchmark rate from 13 percent to 11.25 percent through three straight cuts since August.
Following this week’s auction, the 91-day T-bill’s rate stands at 10.03 percent, down from 15.7 percent on October 3.
The 182-day rate has fallen from 16.6 percent to 10 percent in the period, and the 364-day paper‘s rate from 16.8 percent to 11.75 percent.
While investors continue to enjoy the sky-high interest rates locked in when they bought the securities earlier, they will settle for lower returns if they choose to roll over the papers.
Retail investors including individuals, self-help groups, companies, educational and religious institutions as well as Saccos, have rapidly increased their investments in bonds and T-bills over the last two years.
They were attracted to high interest rates that have seen returns on government paper race ahead of equities and real estate—which offer measly or negative returns.
Their holdings of government debt jumped from Sh287.6 billion at the beginning of 2022 to Sh765.9 billion currently, an increase of 167 percent, making them the third largest domestic lender to the government behind commercial banks and pension funds.
This category of investors has also previously trailed insurance companies and parastatals.
Those who invested indirectly in Treasury bills via unit trusts can also expect lower returns in coming months as the funds roll over their existing holdings at lower rates.
Money market funds, which account for 62 percent of the Sh316.4-billion-unit trust assets under management, are mainly invested in short-term government securities and cash deposits. There will also be a knock-on effect when banks revise downwards their deposit rates, which they raised as they sought to curb the flight of high-net-worth savings to the government debt market.
Cheaper deposits will provide room for banks to cut market interest rates that are expected to support economic growth through increased demand for loans.
“Because the Treasury bill rates had been attractive to depositors, there had been some movement of deposits from banks to Treasury bills, and therefore banks had to raise their interest rates to attract deposits… Now the situation has reversed,” said CBK Governor Kamau Thugge.
The CBK’s Monetary Policy Committee (MPC) has observed that short-term rates on government securities had declined sharply in line with its key rate. However, it said banks had not responded by lowering their rates proportionately.
Recent Treasury disclosures show that in the year to June 2024, retail investors overtook banks in terms of Treasury bill holdings.
Their share of the Sh615.8 billion T-bills market (as of June 30) stood at 56.2 percent, ahead of banks (33.8 percent) trusts and pension funds (8.9 percent) and insurance companies (1.1 percent).
The growth has been fuelled in part by the introduction of the CBK’s Dhow CSD digital platform that allows investors to buy and sell government securities online and through their mobile phones, making it easier for new investors to access the previously hard-to-reach securities.
In a bid to lock in higher interest rates for longer, investors have in recent weeks bid heavily on Treasury bills—especially the one-year paper— following the clear signal from the CBK that rates are being brought down.
The 11 Treasury bills auctions since the beginning of October have yielded cumulative bids of Sh744 billion, against a target of Sh264 billion, equivalent to an average of Sh67.6 billion worth of offers every week versus a target of Sh24 billion.
The CBK has in the period taken up a total of Sh397 billion, with the oversubscription allowing it to leave expensive bids on the table.
The bond market is also signalling lower rates on longer-term government debt. Wednesday’s auction of a reopened 10-year bond saw investors taking an effective return of 14.68 percent on accepted bids, against the paper’s coupon (or actual interest rate) of 16 percent.
This meant that they were willing to pay a premium on the face value in order to secure the bond. The successful bidders averaged a price of Sh113.83 for every unit of Sh100 on the paper.
Falling rates on both bonds and Treasury bills will likely push investors to seek alternative investments such as equities, which are still largely offering discounted entry prices on most stocks.
The Nairobi Securities Exchange (NSE) was one of the casualties of the flight to bonds over the last two years, but has in recent weeks seen some stocks rally sharply on rising demand for shares.
Other than potential for capital gains, a number of stocks have now seen their dividend yields overtake the competing returns from Treasury bills following the latter’s recent slide in rates.
Firms such as Williamson Tea, Stanbic Bank, Standard Chartered Bank Kenya, KenGen, Kenya Power, Kenya Re, and BAT Kenya are offering dividend yields above 11 percent.
