The recent rapid decline in interest rates on Treasury bills has eased off, pointing to a potential bottoming out of rates amid reduced appetite for the securities from investors.
Last week’s auction saw the rate on the 91-day Treasury bill fall to 9.82 percent from 9.89 percent the previous week, while the rate on the 182-day T-bill remained unchanged for a third straight week at 10.02 percent.
The 364-day paper meanwhile registered a drop in rate from 11.4 percent to 11.37 percent.
Subscription levels for the short-term papers have dropped significantly over the last four auctions, in contrast to the previous three months when the government was realising heavy oversubscriptions.
Previous sales were heavily oversubscribed as investors looked to lock in higher returns ahead of the expected decline in interest rates, but this rush to buy has now eased as returns net of withholding tax (15 percent) fell into single digits.
Last week’s sale saw bids of Sh15.69 billion, equivalent to 65 percent of the target of Sh24 billion, while the previous three weeks had realised bids of Sh4.87 billion, Sh13 billion and Sh16.6 billion.
Going into December, investors had been offering the government up to Sh85 billion per week as they raced to lock in returns before rates came down.
In 10 T-bill auctions between October 3 and December 5, investors offered the government a total of Sh723 billion—an average of Sh72.3 billion per week— with the Central Bank of Kenya (CBK) accepting Sh384.8 billion, or just over half of these offers.
Interest rates on government securities were coming down at the time in line with the progressive cut in the CBK’s base rate from 13 percent to 11.25 percent between August and December.
The T-bill rates had touched highs of between 16.72 and 16.99 percent in March 2024, and held at these elevated levels for several months before starting a rapid decline of between 5.1 and 6.6 percentage points between October and early December.
In contrast, the last four weeks have seen the rates across the three tenors fall by between 0.52 and 0.63 percentage points, indicating a bottoming out until the CBK makes further cuts on its base rate.
T-bills attract a withholding tax of 15 percent on interest payments, meaning that all three tenors are now giving new investors a net return that is in the single digits, resulting in reducing competitiveness of the securities compared to longer term bonds and some listed stocks.
