T-bills Undersubscribed for the 3rd week- #CytonnReport

During the week, T-bills were under-subscribed for the 3^rd week, though there was an increase in the performance rate to 82.1%, from 36.4% recorded last week according to Cytonn Report.

This was a significant improvement owing to subscriptions for the 91, 182 and the 364-day increasing to 80.5%, 50.2% and 115.1%, respectively, compared to 48.9%, and 46.3% and 18.1% recorded the previous week. Yields for the 91-day and 182-day increased to 7.6% and 9.9% from 7.0% and 7.6%, respectively, while the 364-day yield declined by 10 bps to 10.9% from 11.0% the previous week. Of interest is the high subscription rate of the 364-day, with a decline in rates on the same, and we shall investigate further why this is the case given that the number of bidders were also much fewer, which is an indication of more corporate participation on the paper.

The 91-day T-bill is currently trading below its 5-year average of 10.0%, having witnessed a downward trend in the last two months. The downward trend for the 91-day paper has reversed and we are witnessing upward pressure on the rates due to pressure on Government borrowing given the new fiscal year, which has been characterized by an uptick in inflation.

This week, Government issued 2 bonds, a 5-year bond (FXD 2/2016/5) and a reopened 20-year bond (FXD 1/2008/20) with a time to maturity of 12 years, for the purpose of budgetary support. Given:

• Pressure on Government to finance the 2016/2017 budget,
• Low liquidity in the money market owing to CBK’s mop up activities through repos to anchor inflationary pressures, we expect upward pressure on interest rates.

The Central Bank weekly report revealed that the interbank rate decreased by 230 bps to 6.4%, from 8.7% the previous week, despite a net liquidity reduction of Kshs 1.6 bn in the money market.

The liquidity reduction was as a result of the CBK’s mop up activity through repos worth Kshs. 15.0 bn to anchor inflationary expectations and to protect the shilling. The interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net amount. This is further an indication that all banks do not trade freely with each other in the market. The repo rate is currently at 9.0%, which is higher and more attractive compared to the interbank rate at 6.4%.