The yield or interest rate on domestic debt is likely to come down in the next few weeks on reduced government demand for cash as a result of the successful issuance of the sovereign bond, analysts have said.
The government has been under pressure to finance the budget deficit, which it projects will stand at 7.2 per cent of GDP or Sh621 billion by the end of the current fiscal year.
Last week Kenya borrowed $2 billion (Sh202 billion) in 10 and 30-year bonds, which will account for a large chunk of the country’s target of Sh323 billion in net external financing for the fiscal year.
The issuance of the Eurobond, say analysts at Commercial Bank of Africa (CBA), is likely to mirror the effect of the 2014 bond, where there was a drop in yields after the government cooled its appetite for domestic financing.
“This could reduce the government’s domestic borrowing appetite in the near term, considering the country’s less than 80 per cent development budget absorption.
Combined with the persistently sound interbank liquidity, this should enhance downward pressure on yields across the curve,” said CBA in their latest weekly fixed-income report.
After the 2014 Eurobond, the 91-day Treasury bill rate came down by 2.8 percentage points, the bank’s Treasury department said in the report.
“In hindsight, after the debut Euro bond issue in 2014, the government cut the domestic debt target for the 2014/15 fiscal year by about 50 per cent, a move that was partly credited for the near 280 basis points drop in the benchmark 91-day T-bill rate in the two months following the issue.”
In an earlier fixed-income note, Dyer & Blair Investment Bank said that reduced borrowing pressure from the Treasury locally will also weigh on banks to cut their interest demand on government securities, especially with the rate cap effectively limiting their options.
“Simply put, banks will be competing for an even smaller pie in auctions, strengthening the government’s already upper hand,” said Dyer & Blair in their 2018 fixed income outlook.
Last week, Treasury bill rates fell slightly to 8.03, 10.39 and 11.13 per cent on the 91-, 182- and 364-day tenors respectively.