Treasury Bills Subscription Declines -Cytonn Report

During the week Treasury bills subscription declined to 145.1 percent from 207.3 percent the previous week with subscriptions for the 91-day, 182-day and 364-day T-bill declining to 182.5 percent, 141.2 percent, and 124.4 percent, respectively, from 278.6 percent, 201.8 percent and 165.2 percent the previous week.

The decline in subscription rates was as a result of investor activity being skewed towards this month’s primary bond auction. The yields declined marginally this week, with rates coming in at 8.0 percent, 10.1 percent and 11.6 percent for the 91, 182 and 364-day T-bills, respectively, compared to 8.2 percent, 10.3 percent and 11.7 percent, the previous week.

The government issue of a 2-year FXD 2/2016/2 bond and a 9-year IFB 1/2016/9 infrastructure bond was highly subscribed with a performance rate of 269.8 percent equivalent to Kshs 80.9 bn with the government accepting Kshs 39.6 bn with a skew towards the IFB 1/2016/9 where they accepted Kshs 34.9 bn compared to Kshs 4.7 bn accepted for the FXD 2/2016/2 despite the higher demand for the two year.

The government could be seeking to lengthen their debt maturity hence the skew. The average yields for the for the 2-year and the 9-year bonds came in at 12.5 percent and 13.5 percent respectively in line with our recommended bid range of 12.4 percent – 12.9 percent and 12.3 percent – 13.3 percent for the 2-year and the 9-year bonds, respectively.

Investors’ focus is shifting towards longer-dated papers as rates have stabilized within the shorter end of the yield curve and are fairly priced on a risk-adjusted basis.

Read: Central Bank Offers 2 and 9 Year Treasury Bonds

The 91-day T-bill is currently trading below its 5-year average of 10.5 percent, having witnessed significant stability in the last two months with the rate only declining slightly week on week. It is expected that interest rates will remain stable for the better part of 2016, and the rates have bottomed out at the current levels. Below are the yields for the 91-day T-bill for the past 5 years.

According to Bloomberg, yields on the 5-year and 10-year Eurobonds issued in 2014 have declined 225 bps and 150 bps, respectively since their peak in mid-January 2016 on account of improving macro-economic conditions. Week on week, the rates rose to 6.5 percent and 8.1 percent from 6.0 percent and 7.7 percent respectively.

There has been a noticeable upward trend in the Eurobond yields over the last one month with yields increasing approximately 500 bps, following the current stalemate on the IEBC debate with weekly chaos across several cities every Monday. Investors perceive an increasing country political risk profile, which causes investors to demand a higher premium to hold the Kenyan Eurobond.

Article by Vera Shawiza.