Investors gave the cold shoulder to Sh24 billion of Treasury Bills for sale on Monday with bidding for some issues at its lowest in nearly 12 months.
Some blame the poor demand on inflation as others believe the holiday week prior might have had a negative impact on auction participation.
Notably, the ratio of bids to the amount offered or bid-to-cover ratio (BtC), which is a gauge of auction demand, was at 1, same as for the 182 and 364 day T-bills. This means the amounts sold were exactly as bids accepted from investors.
The BtC ratio seems to have fallen back to its normal range since peaking in November 2024 at 7.42 (91-day), 2.29 (182-day) and 1.32 (364-day).
These peak auctions were quite remarkable but unsurprising given the high rates witnessed at the short end auctions at that time. So where’s liquidity headed? I bet since no one is really looking to aggressively remain short duration right now, the long end of the curve appears most attractive.
Typically, as rates fall, bonds with higher yields become more attractive causing prices to rise.
Maturities of five to 10 years, for instance, are sensitive enough to capture price gains when rates drop but they also carry less interest risk than longer-term bonds.
A good example is the FXD1/2024/10 paper, which was re-opened 5x last year (latest being in December) and spots a relatively high yield (16 percent) amongst the longer-term bonds.
With accepted bids at 14.6 percent, it easily stood out as one of the few issues investors paid a premium on the face value at the auction. It marked a departure from the recent past when some investors reduced duration, focussed on short-term dated treasuries instead, or stayed neutral.
Such a long-term play would work if some of the factors “behaved”. One is if the country is able to stay fiscally disciplined.
The financial ministry forecasts a fall in the budget deficit to 3.5 percent of gross domestic product (GDP) in the 2025/26 fiscal year that starts next July from Sh768 billion (4.3 percent of GDP) in the current fiscal year. The deficit is also expected to drop further to 3.3 percent of GDP in the 2026/27 fiscal year.
Two is if inflation remains benign or at least between the target range: 2.5 percent and 7.5 percent. Thankfully, dwindling inflation has finally allowed the Central Bank to lower interest rates. Kenya’s consumer inflation stood at three percent year on year in December, up from 2.8 percent a month earlier.
On a monthly basis, inflation was 0.6 percent compared with 0.3 percent in November according to the Kenya National Bureau of Statistics (KNBS).
Interestingly, the shift towards bonds is already underway in both emerging and developed markets. It is estimated that investors poured a record Sh77 trillion into global bond funds taking advantage of some of the highest yields in decades. Indeed, the story is about income.
The question is; Would the changing local market dynamics push investors to lock in the relatively high yields available? Would they deliver 2025 as the “year of the bond”? Time will tell.
