Interest rates on short-term government securities have now risen to highs of between four and seven years across different tranches, signalling a new round of increase in the cost of bank loans as the lenders’ expenses on deposits go up.
The rates have been rising steadily in line with the hikes in the Central Bank of Kenya (CBK) base lending rate which jumped by 1.75 percentage points to 8.75 percent last year in a bid to arrest inflation.
The 182-day Treasury bill has now touched the 10 percent mark for the first time in four-and-a-half years, while the 91-day paper is at a seven-year high of 9.9 percent.
The 364-day or one-year paper is also at a four-and-a-half-year high, at 10.7 percent.
Bankers will be forced to match the higher T-bill rates in an attempt to encourage larger depositors to leave their money with banks instead of lending to the State, and this higher cost of funds is ultimately passed on to consumers in the form of expensive loans.
This cost-of-funds-related upward pressure on loan rates coincides with a period of banks reviewing their lending terms to reflect borrower risk, following the approval of the majority of their risk-based pricing models.
For investors in government debt, the uncertainty over interest rates means that they are now favouring short duration securities in order to have the flexibility to take advantage of higher-yielding papers if rates go up in the near term.
“As expectations for rising interest rates strengthen, investors will continue to favour shorter maturities in the expectation that they can take advantage of the positive rollover risk undulation. This indicates a favourable subscription trend, especially for the 91-day paper,” said analysts at NCBA in a fixed income note.
“These interest rate projections are informed by elevated inflation and expectations of a tighter monetary policy.”
The higher demand has now seen Treasury bill auctions outperform bonds in terms of bid volumes in the past one month.
Last week’s T-bill sale raised bids worth Sh44.9 billion against a target of Sh24 billion, with the 91-day paper accounting for Sh31.2 billion out of this amount.
On the other hand, the dual-tranche February Treasury bond sale which also closed last week raised Sh16.74 billion against a target of Sh50 billion, despite offering up to 14.15 percent in interest.