Treasury Bill Auctions Undersubscribed in August

Treasury bill auctions continued to be undersubscribed in August, with an overall subscription rate of 55.2%, compared to 42.0% in July. The undersubscription was as a result of

• tight liquidity in the market during the better part of the month,

• the uncertainty in the interest rate environment, and

• mop-up activities by Central Bank of Kenya (CBK) in support of the Kenya Shilling, which led interbank rates to increase significantly and touch a high of 26.3%.

Yields on the 91-day paper remained flat at 11.5%, while yields on the 182-day and 364-day T-bill recorded an increase to close at 12.4% and 13.8%, from 11.9% and 13.5%, respectively, in July.

During the month, the Treasury re-opened a 2-year bond worth Kshs 20 bn to raise money for budgetary support. The bond saw a subscription rate of 97%, with yields increasing by 220 bps to 14.8%, from 12.6% in June. The average market bid rate came in at 17.0%, indicating investors are demanding higher premiums due to uncertainty in the direction of interest rates.

On average, NSE FTSE bond index lost 0.7% in the month of August and about 2.4% from January, However, in reality, with the market duration at 3.89, and yields having increased by an average of 2.5%, the bond market has lost close to 10% YTD.

The government’s borrowing programme for the current fiscal year is behind schedule; instead of net borrowing, the government has so far made a net repayment of Kshs 21.9 bn for the current fiscal year. Consequently, we expect the government to step up domestic borrowing in a bid to raise the Kshs 219 bn budgeted for the year. The stepped up domestic borrowing will further result in upward pressure on interest rates, and therefore we continue to maintain our view that investors should be biased towards short-term fixed income instruments due to the uncertainty of the rate environment.

Excerpt from the Cytonn Monthly Report – August 2015