Fixed Income
There was an improvement in Treasury bill auction subscriptions in the week, with the total subscriptions at 69% compared to 30% experienced the previous week; and this is despite tight liquidity in the money market due to tax payments and mop up by the Central bank in support of the shilling.
Key to note is that the 91-day bill was highly oversubscribed, at a 200.3% subscription rate, while the 364-day received a 19% subscription, indicating that the market prefers to invest in shorter duration securities, with the market expecting that rates will continue rising while Central Bank seeks to raise more long-term funds.
Yields on the 364-day T-bills increased by 140 bps to 12.5% from 11.1% while the yields on 91-day and 182-day T-bills remained relatively unchanged at 11.3% and 12.2%, respectively. There will be a five-year bond re-open next week and we will give a more detailed report next week on the same, but our preliminary thoughts are that the average yield could be above 13.5%.
In a bid to further review the recent poor performance of the Kenya Shilling, The Monetary Policy Committee (MPC) has scheduled its next meeting for 5th August 2015, only a month after the last meeting. The recent interest rate hike by the MPC has done little to stem the shilling’s depreciation. During the week the shilling lost 1.7% to the dollar to close the week at 102.5, bringing the year to date decline to 13.0%.
We maintain our expectation that market interest rates will remain high because of (i) the government’s need to finance its budget deficit through local borrowing, and (ii) the need to support the shilling.
We hold our earlier recommendation that investors should invest in short duration fixed income instruments as we await certainty of the rate environment.