Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Investors rush for bonds as T-bill rates fall behind
T-bill rates stood at between 16 and 16.9 percent in July 2024, while bonds sold in that period were offering yields of between 16.3 and 18.1 percent for durations of between two and nine years.
Investors in government securities have raised their appetite for bonds compared to Treasury bills in recent auctions, chasing higher returns as the spread in rates between the short and long dated papers widens.
The last three T-bill auctions have failed to hit the usual weekly target of Sh24 billion, raising Sh22.75 billion, Sh21.76 billion and Sh14.48 billion. In contrast, sales done over the preceding four weeks had yielded offers of between Sh27 billion and Sh61 billion each.
Meanwhile the June and July bonds that each targeted Sh50 billion were oversubscribed, despite locking in buyers to tenors of between 9.7 and 18-years.
The June bond sale raised Sh71.6 billion from offers of Sh101.4 billion, while the July sale netted Sh66.7 billion from bids worth Sh76.9 billion.
T-bills are now paying rates of between 8.14 percent for the 91-day option and 9.71 percent for the 364-day paper, compared to yields of between 13.48 percent and 14.34 percent on the June and July bonds.
A spread of 6.2 percent between the reopened 25-year bond sold last week at a yield of 14.34 percent and the 91-day T-bill (8.14 percent) is therefore proving wide enough to entice investors to overlook the duration risk of committing funds to long term bonds.
“Low subscription observed over the last two T-bill auctions may on the face of it appear to signify a shift toward the long end of the curve,” said analysts at NCBA in a fixed income note.
“In view of the local debt redemption profile, the sovereign will continue to issue attractive longer-dated paper to ease debt service pressures later in the year, especially in the event of a wider deficit.”
Unlike buyers who lock in funds in long term bonds, T-bill investors retain enough flexibility due to short term redemptions to take advantage of alternative high return investment opportunities such as stock market rallies.
One year ago, the difference in rates between T-bills and bonds was much narrower, making it more prudent for investors to put funds in the short dated securities as they awaited clarity on the direction of interest rates.
T-bill rates stood at between 16 and 16.9 percent in July 2024, while bonds sold in that period were offering yields of between 16.3 and 18.1 percent for durations of between two and nine years.
The NCBA analysts added that the government has shown reduced sensitivity to prices in recent auctions in light of its tight fiscal position, raising the prospects for higher rates on offer for longer dated paper.
In the 2025/2026 fiscal year, the Treasury is staring at a budget deficit of Sh923.2 billion, which will be financed through domestic borrowing of Sh635.5 billion and external borrowing worth Sh287.7 billion.
This projected deficit is however lower than the Sh997.5 billion hole in the previous fiscal year that ended on June 30, for which the domestic financing component stood at Sh815.6 billion and external borrowing at Sh184.29 billion.
The wide deficit has seen investors resist the CBK’s efforts to lower bond rates further, even after the successive base rate cuts from 13 percent to 9.75 percent between August 2024 and June 2025.
It was seen as one of the reasons for the CBK accepting an amount higher than its target in the July 2025 bond, while also offering investors a price discount despite the offer being oversubscribed.
In this sale, the two reopened 20 and 25-year bonds carried coupons (actual interest rates) of 13.2 and 13.4 percent respectively, but the yields on accepted offers stood at 13.89 percent and 14.34 percent.
To make up for the difference between the coupon and yields, the CBK offered price discounts of Sh4.16 and Sh6.08 respectively per bond units of Sh100.
