We continue to hold our April recommendation that investors stay biased towards short duration fixed income instruments.
Treasury bill auctions continued to be undersubscribed, with a 23.7% overall subscription this week after a 47.7% subscription last week; undersubscription is due to tight liquidity in the money markets as a result of corporate tax payments and mop-up activity by the CBK to support of the shilling. However, investors continue to prefer short-term investments, as seen in the 91-day T-bill subscription, which had Kshs 1.1 bn subscribed versus Kshs 1 bn offered.
Despite the recent 150 bps rate increase by MPC, yields remained relatively unchanged at 8.3%, 10.6% and 11.1% for the 91, 182 and 364-day papers, respectively. The fact that yields have not changed despite a 150 bps MPC rate increase is an indicator that the Central Bank Rate (CBR) has not been fully accepted by the market as a policy tool hence raising doubt about its effectiveness as a monetary tool.
Despite a depreciating dollar in the global markets, the Kenya Shilling still depreciated by a further 1.0% against the dollar during the week to close at Kshs 98.2 on the back of dollar demand from the manufacturing sector for imports. We expect further weakening in the shilling driven by end-month demand by importers, however this will be cushioned by Central Bank’s activity in the market and a weaker dollar given expectations of a more prolonged rate increase timeframe by the Fed.
In a bid by investors to diversify their fixed income portfolios into corporate bonds, Centum Investment’s 5-year, Kshs 6 bn corporate bond received bids worth Kshs 8.31 bn, a 38% oversubscription. The equity-linked note (“ELN”), which will offer investors higher returns based on the performance of the company’s net asset value in addition to the 12.5% coupon, received subscription worth Kshs 3.5 bn (42%), while the 13.0% fixed coupon portion received subscription worth Kshs 4.8 bn (58%). The 42% ELN subscription is higher than the last time Centum offered an ELN, a clear indication that investors are seeking higher risk-adjusted returns and willing to look at unconventional investment instruments.
We expect yields on government securities to increase due to a number of factors:
House View: Our view is that in the short term, investors shy away from equities and long dated fixed income, because of stretched valuations and risk of rate increases, respectively; and park money in high yielding short dated instruments and money markets as they await better entry points.