The uncertainty over interest rate direction that has made investors cautious about committing to the longer-term bonds on offer, combined with the Central Bank of Kenya (CBK)'s stance of rejecting expensive bids in the market, have led to the underperformance of bond issues in recent months.
The Treasury has raised less than half of the targeted amount of domestic borrowing increasing chances that it will issue a tax-free infrastructure bond shortly.
The uncertainty over interest rate direction that has made investors cautious about committing to the longer-term bonds on offer, combined with the Central Bank of Kenya (CBK)'s stance of rejecting expensive bids in the market, have led to the underperformance of bond issues in recent months.
The five issues offered since July, seeking a total of Sh192 billion, have managed to raise Sh85.5 billion in net acceptances, leaving the Treasury to rely significantly on shorter-term Treasury bills to fill the domestic borrowing gap.
These bonds have all been tenured between 10 and 20 years, thus starving the market of the shorter-term paper that it is craving, and in turn pushing investors to the secondary market.
“Coupled with the fact that ordinary revenue has fallen off tangent, we are of the view that the Treasury will be under pressure to meet its net domestic borrowing target,” said Genghis analyst Churchill Ogutu in a report.
“What will give in this scenario is that a short-end paper – or an infrastructure bond - will be issued at some point in the fourth quarter of 2018 to better net domestic borrowing performance.”
The Treasury, as per the 2018/19 budget, has a domestic borrowing target of Sh271.9 billion, which combined with the external target of Sh287 billion would bring net borrowing for the year to Sh558.9 billion.
Maturities will also be a factor for the Treasury, standing at a steep Sh188.6 billion for Treasury bills in November and December, and Sh60.1 billion for bonds in the same period.
Ideally, the lower rate across all tenors of debt would make it attractive for the government to increase its pace of domestic borrowing, especially given that banks have recently favoured lending to the Treasury more than private sector due to the cap on loan rates.
The lower rates, however, pose a headache to these lenders, who have taken to government debt as a substitute for customer lending, and may force them to make a choice between lower returns in the risk-free government paper or to return to the riskier customer loans for which they can charge up to 13 percent.
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