The Treasury has re-entered the money market seeking Sh35 billion through the reopened recently floated 15-year infrastructure bond from which it took only Sh5 billion.
The initial subscription for the paper was Sh55.7 billion against an offer of Sh40 billion, but the Treasury only took bids that did not exceed the coupon (interest) rate of 12.5 per cent. It rejected the rest of the bids, thereby failing to realise the Sh40 billion amount targeted to be raised.
The market re-entry with the same bond, also called a tap sale, came as widely anticipated by analysts and dealers who had initially projected that investors would demand slightly more yield than offered through the 12.5 per cent coupon.
However, the infrastructure bond has been seen as disruptive — as seen in the bid/ask spread — to the rest of fixed-income market since some dealers initially said they expected the Treasury to be more willing to give a discount.
“Market activity was subdued yesterday [Monday] as investors continued to go through price discovery across the curve after the disruption by the IFB1/2018/15. The BID/ASK spread on the medium term remained at an average of 20bps as a consequence of this uncertainty and discovery,” said Genghis Capital in a note to fixed-income investors at the end of trading on Monday.
In its advertisement for the tap sale, the CBK said it would take the bids on the basis of the yield of 12.5 per cent that was accepted in the initial offer and stressed that allocation would be on a first-come first-served basis.
Liquidity has been cited as the critical factor in the bids for the bond. In recent times, the Central Bank of Kenya has reported that liquidity has been tight as seen through the interbank rates, but it has occasionally intervened to pump cash into the market.
However, Genghis reported that the situation appeared calm on Monday with the CBK staying out of the market.
“The overnight rate remained flat at 6.3 per cent and the CBK sat out of the market indicating a square market,” said Genghis.