Treasury to stop selling 364-day T-bills in reforms

The government has an option of issuing one or two-year Treasury bonds when need arises, offering an alternative route for those currently buying one-year T-bills.

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The National Treasury is proposing to withdraw the one-year Treasury bill from the market, as part of reforms meant to reduce exposure to short term securities and improve transmission of monetary policy in the economy.

The newly published 2025 Draft Medium Term Debt Strategy, says that the optimal debt strategy calls for lowering the debt maturing in one year as a percentage of the gross domestic product, and lengthening the debt maturity both in the domestic and external portfolio.

This will require a cut in the stock of Treasury bills, with the 364-day paper seen as the likeliest candidate, due to the prominence of the 91-day and 182-day as risk-free benchmarks or pegs for credit pricing in the economy.

The government also has an option of issuing one or two-year Treasury bonds when need arises, offering an alternative route for those currently buying one-year T-bills.

“Approaches to deal with debt management challenges include…reduction of variety of money market instruments from three (91-day, 182-day and 364-day) to two (91-day and 182-day). The National Treasury will cease issuance of the 364-day Treasury Bills,” reads the draft debt strategy in part.

Over the last five years, the government has made efforts to reduce the refinancing risk on its domestic debt, by reducing the share of the debt held in T-bills, whose frequent refinancing needs can pose a liquidity problem for the exchequer.

As at last week, the share of domestic debt held via T-bills accounted for 14.34 percent of the government's domestic debt, equivalent to Sh844.6 billion.

This share has come down from highs of 34 percent in June 2019, reflecting the years of efforts by the CBK to cut uptake of new debt through the short-term securities.

Reducing the number of securities at the short end will also help improve transmission of monetary policy (though the interest rate channel) by improving pricing discovery on the short end of the government’s debt, analysts say.

“The reduction has a lot to do with enhancing transmission of monetary policy. Having a less segmented money market may help achieve that,” said Rufus Mwanyasi, the managing director of Canaan Capital; a firm that manages an investment partnership that focuses on listed securities.

“The move may also be part of CBK's modernisation drive from 2021. We have (already) seen the implementation of the interest rate corridor aimed at keeping interbank rates between plus or minus 2.5 percent on the central bank rate (CBR) and reducing the discount window rate from 400 basis points above CBR to 300 basis points.”

The National Treasury currently targets Sh24 billion from T-bill issuances every week, comprising Sh10 billion apiece from the 364-day and 182-day tenors, and Sh4 billion from the 91-day T-bill.

The current interest rate on the one-year paper stands at 11.3 percent, while the six-month and three-month tenors are paying 10.02 percent and 9.56 percent respectively.

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