Domestic debt cost at 69 month low on rate caps

The Treasury’s short-term borrowing costs have dropped to a 69-month low, reflecting the prevailing low interest regime touched off by legal caps on loan charges.

Rate controls, much opposed by the Bretton Woods, have seen banks significantly cut loans to small businesses and homes perceived as risky customers in favour of relatively risk-free government securities.

Yields on the benchmark three-month Treasury bills fell for the sixth straight week to an average 7.25 percent at the auction last Thursday.

That was the lowest rate since March 14 (6.84 percent) when the returns to investors lending cash for three months sunk to a low last seen in late July 2013.

The Central Bank of Kenya (CBK) sold the 182-day T-bills for an average 7.96 percent, the first time the rate has slipped below eight percent since August 1, 2013 auction when it averaged 6.87 percent.

The CBK, the government’s fiscal agent, further accepted one-year bids for 9.32 percent, which was unchanged from the previous week’s but still marked the lowest yield since the auction on July 18, 2013 (9.06 percent).

Cash-rich firms, largely banks, use T-bills auctions as cash management instruments besides generating returns.

“The biggest investors in Treasury bills (banks) don’t have a choice,” Kenneth Minjire, head of fixed-income securities at investment banker Genghis Capital,” said.

“There are no short-term papers in the secondary market and you are not lending, so the only option is government securities. You will rather be earning seven percent on depositor’s money than earning zero.”

Lower yields

Analysts at Cytonn said they also expect the relatively lower yields on short-term government debt to persist at least in the near term.

“(This is due to) the discipline of the CBK in stabilising interest rates in the auction market by rejecting aggressive bids that are priced above market, for both T-bills and T-bonds and the maintaining of the Central Bank Rate at 9.0 percent set by the Monetary Policy Committee in their March 2019 meeting,” Cytonn analysts wrote in this week’s report.

Tight liquidity as a result of quarterly tax payments, which usually peaks from April 20, however, saw bids for T-bills fall to 48.96 percent from 113.78 percent, the first time subscription fell below 50 percent since 23.78 percent level during the sale on December 13, 2018.

The tight market, reflected in the interbank rate which hit 6.22 percent on Monday, is likely to persist as the banks gear up to next cash reserve ratio cycle.

The lenders are required to maintain an average of 5.25 percent of their total deposits daily in their accounts with the CBK for a month that ends on 14th.