T-bills keep double digit real returns on falling inflation
The inflation-adjusted or real return for 364-day Treasury bill investors stood at 12.91 percent in October even as the average yield on the paper fell to 15.67 percent from 16.81 percent in September.
Investors in government paper have retained double-digit returns above the rate of inflation, benefitting from a reduction in cost of living measure even as interest on the securities decline.
The inflation-adjusted or real return for 364-day Treasury bill investors, for instance, stood at 12.91 percent in October even as the average yield on the paper fell to 15.67 percent from 16.81 percent in September.
The double-digit real return was maintained as inflation fell to a 17-year low of 2.76 percent in October from a higher 3.56 percent in September.
Inflation-adjusted yields are derived from subtracting the prevailing inflation rate from the interest rate earned on a specific asset class.
Consumer prices have remained muted in recent months on low food and fuel prices, with the former supported by adequate rainfall so far this year, which has helped to increase food supplies.
Fuel prices have, meanwhile, remained largely unchanged on a stable foreign exchange rate as the local unit trades in a narrow range supported by ample forex liquidity in the market.
The low inflation rate has helped to maintain the margin in yields on government paper as interest rates on Treasury bills and bonds retreat from multi-year highs on monetary policy easing by the Central Bank of Kenya (CBK).
Interest rates on Treasury bills have, for instance, fallen for 17 consecutive weeks since the start of August, anchored on CBK cuts of the benchmark lending rate in August and October.
CBK cut its benchmark lending rate for the first time since the pandemic in August, moving the key rate to 12.75 percent from 13 percent before effecting a bigger cut in October, setting the benchmark at 12 percent.
The secondary rate cut was seen as decisive by market participants, sustaining the momentum of the interest rates reversal on government securities by signalling a downward trajectory for domestic yields.
The return on the 91-day, 182-day and 364-day paper fell further last week, settling at 12.034 percent, 12.2095 percent and 13.2949 percent respectively.
Yields on the 91-day paper had peaked at 16.0215 percent in July, while the return on the 182-day and 364-day paper peaked at 16.8521 and 16.9212 percent.
Inflation-adjusted returns on the 364-day paper, meanwhile, peaked in September at 13.25 percent as consumer prices dropped faster than interest rates on lower food and fuel prices.
Real returns were lower at the start of the year at 9.51 percent and 10.53 percent respectively in January and February as inflation ran higher at 6.85 percent and 6.31 percent.
Inflation is expected to remain lower in the short term as lower food, fuel and energy prices keep consumer prices in check.
Inflation could test the government’s lower band for changes to consumer prices, which is set at 2.5 percent, requiring a looser monetary policy stance/lower domestic interest rates to stir up credit demand.
Domestic interest rates are expected to move lower in the short-term with the CBK expected to keep an accommodative stance in a bid to spur economic activity and credit growth.
This would put pressure on inflation-adjusted returns for the investors in the short term, with the real yields likely to fall back to single digits.
