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Capital Markets

Yields tipped to rise over budget, rate cap removal

Central Bank of Kenya
Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

Interest rates on government securities are likely to rise and remain volatile in the coming months as a result of fiscal pressures and the removal of rate caps.

Dyer and Blair Investment Bank says that the government will be under pressure to borrow domestically and this would be largely through short-dated securities, with the chance of their yields rising faster than the medium- and long-term bonds.

Reduction in the Central Bank Rate (CBR), which first happened at the end of January, is also likely to support a more volatile government securities market, the investment says adding that it anticipates that there will be at least two cuts in the base rate in the course of this year including that done in January.

“Markets are wary of a repeat (of the yield curve inversion as in 2015 when short-term securities rose dramatically) given the widely reported cash crunch. This will see market players bid aggressively in monthly bond auctions, and without commercial lending caps to act as a cushion, yields will rise,” said Dyer and Blair in a fixed income report.

“In the absence of lending caps, we expect monetary policy to be more effective. In 2020, we expect at least two monetary policy rate cuts [including that of January] as well as a downward revision of the cash reserve ratio.”

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Dyer and Blair added that the rate cuts will be necessitated by the need to support private sector lending at a time there is likely to be pressure on rates resulting from fiscal aggression.

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