One year T-bills rise to 16pc as investors seek better returns

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi. 

Photo credit: File | Nation Media Group

Investors increased their interest rate demands on short-term government debt past the 16 percent mark in last week’s Treasury bills sale, reacting to the move by the Central Bank of Kenya (CBK) to raise its base lending rate by two percentage points in its December 5 policy setting meeting.

The results of the weekly Treasury bills auction showed that the average rate demanded by investors on the 364-day paper stood at 16.41 percent, up from 15.79 percent the previous week. The CBK, however, rejected the expensive bids on the paper, with the average rate for accepted offers standing at 15.83 percent.

The increase in the Central Bank Rate (CBR) to 12.5 percent is expected to translate into higher borrowing costs for the government, which the Treasury hopes will help the exchange rate down the road by attracting foreign investors to government securities.

The T-bills sale raised Sh17.09 billion, against a target of Sh24 billion.

“This upward revision in the CBR is expected to result in an increase in the rates on government securities offered in the primary market with the potential benefit of attracting holders of foreign currency assets, thus unlocking dollar liquidity into the market,” said analysts at NCBA.

Treasury bills had seen limited rate movement in recent weeks after racing to the 15 percent level by the end of the third quarter.

Analysts now expect renewed upward pressure from the CBR hike, and also from the recent adjustment –via the Supplementary Budget— in the net domestic borrowing target for the fiscal year to Sh474.5 billion from Sh415.1 billion.

In last week’s auction, the highest yield was on the 182-day paper, which came in at 15.92 percent, up from 15.74 percent the previous week. The rate on the 91-day paper rose from 15.63 percent to 15.77 percent.

On the 364-day T-bill, the rate went up marginally from 15.79 percent to 15.83 percent, despite the lofty rate demanded by investors.

The relatively low volume of bids on this paper (Sh629 million) meant that the CBK could afford to leave aside the expensive offers without affecting the overall performance of the auction.

Investors instead went for the 91-day paper, which raised Sh13.54 billion, while the 182-day managed Sh2.9 billion.

Aside from the pressure on the taxpayer due to the higher T-bill rates raising the cost of public debt, bank loan borrowers will also be wary of the higher interest rates filtering through to their facilities in a period of economic difficulties that have made it more challenging to service loans.

The rates on T-bills are a key indicator of the risk-free floor for the pricing of loans, with banks tending to adjust both deposit and lending rates upwards whenever the T-bill yields go up.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.