During the first half of the year in 2016, yields on T-bills were on a downward trend with the 91, 182 and 364-day papers declining by 330 bps, 130 bps, and 170 bps respectively, to 7.1, 9.8 and 11.1 percent from 10.4, 11.1 and 12.8 percent in December 2015, respectively.
The decline in yields was as a result of high liquidity in the money markets, especially in the second quarter, highlighted by the interbank rate declining to 2.2 percent in early June 2016 from 7.5 percent at the beginning of the year.
Yields on government securities have remained low since and appear to have bottomed out, mainly attributed to:
- high preference to risk free government securities especially after the capping of the lending rates also as indicated by the reduced lending to the private sector.
- reduced pressure from the government borrowing program as they are currently ahead of the pro-rated domestic borrowing target of 119.2 billion shillings, having borrowed 172.2 billion shillings, which is 144.4 percent of the pro-rated target.
The government is in the process of revising its domestic borrowing target upwards to 294.6 billion shillings from 229.6 billion shillings, which if passed by Parliament, will take the pro-rated borrowing target to 153.0 billion shillings, meaning that the government will still be ahead of the borrowing target.
Despite the stable interest rate environment, there was increased activity in the secondary bonds market as local institutional investors opted out of the equities market, causing bond turnover at the NSE to rise by 39.4 percent to 428.3 billion shillings in 2016 from 307.2 billion shillings in 2015. Based on the yield curve movement and the FTSE Bond Index, the average bond portfolios have made a capital loss of 0.2% over the year.
During the first half of the year, the money markets were characterized by:
- high liquidity, which was skewed towards the larger banks as a result of flight to safety following the closure of Chase Bank.
- Central Bank of Kenya (CBK) actively participating in the money market through reverse repos in a bid to support small banks, by ensuring liquidity distribution in the interbank market. This was evidenced by:
- the decline in average interbank rate from 8.7 percent in H1’2015 to 4.4 percent in H1’2016.
- the oversubscription in government securities.
Yields on the 5-year and 10-year Eurobonds that were issued in 2014, started the year at 7.7 percent and 8.9 percent respectively, hitting their peaks in mid-January, following allegations on the mismanagement of the Eurobond funds, coupled with political instability following the disagreement between the government and opposition over the reconstitution of the electoral body – IEBC, which culminated in the commissioners leaving office. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.1 percent points and 1.9 percent points, respectively, for the 5-year and 10-year bond on account of improving macroeconomic conditions and improved investment outlook of Kenya as a good investment destination.