Yields on T-Bills Increased on Account of Government Borrowing -Cytonn Report

Treasury bills subscriptions declined during the month of July, with overall subscriptions coming in at 95.5 percent compared to 119.5 percent in June.

Yields on T-bills Increased by 130 bps, 110 bps and 70 bps for the 91-day, 182-day, and 364-day T-bills, respectively, closing the month at 8.3 percent, 10.5 percent and 11.4 percent, from 7.0 percent, 9.4 percent and 10.7 percent respectively, at the end of June 2016. Yields have increased on account of Government borrowing given the new fiscal year and tight liquidity levels in the money market which saw interbank rates increase to 4.8 percent from 3.9 percent as at the end of June.

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

In the primary bond market, the government issued two bonds; the 5-year (FXD 2/2016/5) and the reopened 20-year (FXD 1/2008/20) with 11.9 years to maturity, accepting Kshs 33.5 bn compared to the target amount of Kshs 30.0 bn, for budgetary support. Yields on these bonds came in at 14.1 percent and 14.8 percent as investors demanded a premium of 0.5 percent and 0.1 percent above the market rate of 13.6 percent and 14.7 percent for the 5 and 20-year bonds, respectively.

This was due to expectations of upward pressure on interest rates owing to  pressure on Government to finance the 2016/2017 budget, and relatively low liquidity in the money market. In the secondary bond market, bond turnover declined by 59.3 percent to Kshs. 20.5 tn from Kshs 50.4 tn in June. This can be attributed to the tight liquidity levels in the money market which saw interbank rates increase to 4.8 percent from 3.9 percent as at the end of June.

During the month the money market witnessed tight liquidity which saw the interbank rate increase to 4.8 percent from 3.9 percent in June. This was despite a net liquidity injection of Kshs. 4.7 bn which was as a result of government payments of Kshs. 102.2 bn. The increase was as a result of the Central Bank mopping up liquidity from the money market through repos worth Kshs. 52.9 bn which resulted to low liquidity among banks.

The report noted that the interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net amount and it further indicates that all banks do not trade freely with each other in the money market. Key to note is that the amount of T-bill/T-bond rediscounting increased by 328.4 percent to Kshs 28.7 bn from Kshs 6.7 bn in June 2016 This is an indication that the liquidity levels deteriorated during the month of July given that T-bill/T-bond rediscounting is a punitive source of liquidity since it is done at 3% above the prevailing rates.

Read the Cytonn  Report here.