Jittery investors scramble for short-term Treasury securities


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Jittery investors have continued to crowd around the short-dated government securities, with bids for the latest 91-Day Treasury Bill recording a performance rate of 347.9 percent.

Latest data from the Central Bank of Kenya (CBK) shows that the market regulator wanted to raise Sh4 billion from the three-month paper last week, but ended up receiving bids amounting to Sh13.9 billion, which is more than three times the amount sought, continuing a trend that has seen investors snub the long-dated bonds.

Most investors want to lend to the government for a shorter period, pointing to a jitteriness in the investment environment that has also been manifested in the global financial markets where bond yields have risen.

This is a blow to the Kenyan government, which is grappling with debt repayment pressures that have been compounded by high inflation.

"Starting in the last quarter of the financial year 2021/22, domestic debt issuance has taken place mainly at the short-end of the maturity spectrum in an environment of heightened uncertainty in the run-up to the August 2022 elections and rising inflation," said the International Monetary Fund (IMF) in its fourth review of a 38-month programme that the global lender has with Kenya.

In the latest offer, the performance rate of the 182-Day paper and the 364-Day paper from which the CBK wanted to raise Sh10 billion received much lower 9.26 percent and 19.28 percent respectively.

For the Treasury bill, the government sought about Sh11 billion at a weighted average interest rate of 9.37.

Out of the Sh20 billion that it targeted for the 182-Days and 364-Days Treasury Bills, CBK only got 14.3 per cent of the offer, or Sh2.85 billion, as investors avoided the offer.

The performance rate for the 91-Days government security was even higher last week at 487.75 per cent, with the CBK accepting only Sh7.7 billion out of Sh19.5 billion that it had received. The government wanted to raise Sh4 billion.

"Higher investor interest on 91 Day T-Bill reflects uncertainty over the future," said Mohamed Wehliye, a senior adviser at the Saudi Arabian Monetary Agency.

According to Mr Wehliye, investors shunning the attractive, long-dated government securities points to jitters over debt sustainability.

Kenya's credit score was recently downgraded from B+ to B by global rating Fitch pointing to debt repayment pressure amid a tightening global financial market occasioned by the increase in interest rates in the US and other advanced economies.

The shift to short fast-maturing government securities hurts the government's plan to lengthen the average maturity time of its stock of domestic debt to avoid roll-over risks, especially in the current environment where liquidity is tight.

A bunch up in the maturity of four government securities — three Treasury bills and one Treasury bond — saw CBK last month offer to have them swapped with a new infrastructure bond set to mature in six years.

The government securities that were targeted for the switch were valued at Sh87.7 billion.

The Treasury has been able to lengthen the maturity profile of domestic debt resulting in a significant decline in the share of Treasury bills in the domestic debt stock from 35 percent at the end of FY2018/19 to 18.7 percent at the end of FY2021/22), said the IMF.

There has also been a notable increase in the average time to maturity of government domestic bonds, from 6.3 years at the end of FY2018/19 to 9.1 years at end of June 2022.

"This has helped alleviate short-term rollover risks, enabling the local market to absorb pressures in 2022.

About half of government domestic debt securities are held by pension funds, followed by commercial banks with 47 percent share."

President William Ruto wants the government to lend at a rate lower than 10 percent, a move that will dissuade people from investing in longer-dated government securities.

This comes at a time when Kenya has revealed plans to borrow syndicated loans amounting to Sh110.7 billion for budgetary support and replenish its dwindling reserves of dollars by end of June, according to a report by the IMF.

Of the $900 million (Sh110.7 billion), the Treasury has already agreed on the terms for Sh36.9 billion, as the country reverses its stance against borrowing from commercial banks.

Due to the volatility in the global market that has seen yields on external bonds rise, Kenya was forced to cancel plans to issue its fifth Eurobond of about $1.1billion (Sh135.3 billion), denying the country much-needed foreign exchange reserves at a time when the country is grappling with dollar shortage.

The IMF noted that the Treasury officials are "well advanced" in tapping medium-term loan facilities from international banks, with the full amount expected to be disbursed by early next year.

Treasury Cabinet secretary Njuguna Ndung'u told the IMF boss in a letter of intent that they took this route after the planned issuance of $1.1 billion external commercial financing for the financial year 2021/22 did not take place amid unfavourable market conditions, in what reflected the global risk-off attitude toward frontier issuers.

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