Treasury Bills Subscriptions Decrease Compared to Previous Week- Cytonn Report

During the week, Treasury Bills were oversubscribed with overall subscription decreasing to 169.3 percent, compared to 175.7 percent recorded the previous week.

Subscription rates decreased for the second consecutive week for the 91-day and 364-day papers coming in at 158.6 percent and 177.9 percent, from 225.0 percent and 192.7 percent, respectively, the previous week.

According to this week’s Cytonn Report, the subscription rate for the 182-day paper increased to 167.8 percent from 125.7 percent, the previous week, as it offers the best return from on a risk adjusted basis. The overall decline in subscription for this week is attributed to investors’ preference to participate more in the 5-year and 20-year primary bond auction which received a subscription rate of 225.8 percent. Yields declined across all tenors with the 91, 182 and 364-day papers decreasing to 7.9 percent, 10.6 percent and 10.6 percent from 8.0 percent, 10.8 percent and 10.9 percent, respectively, the previous week.

Cytonn Investments further reported that the 91-day T-bill is currently trading below its 5-year average of 10.4 percent adding that the downward trend for the 91-day paper is mainly attributed to the expected low interest rate environment, following the operationalization of Banking Act Amendment 2015 and the government stepping up their borrowing program which currently is ahead of the pro-rated domestic borrowing target of Kshs 57.4 bn having borrowed Kshs 89.2 bn.

Last week, the government offered two bonds; the 5-year (FXD 3/2016/5) and the 20-year (FXD 1/2016/20), to raise Kshs 25.0 bn for budgetary support. Yields for these bonds came in at 13.1 percent and 14.1 percent, with the 20-year bond being in line with the recommendations of Cytonn Investments in their previous report, where they were of the view that investors should bid between 14.0 percent and 14.9 percent.

The Central Bank accepted Kshs 35.3 bn compared to the target amount of Kshs 25.0 bn. Investors bid 0.2 percent and 0.5 percent below the market rate of 13.3 percent and 14.6 percent for the 5-year and 20-year bonds, respectively. This was due to expectations of downward pressure on interest rates owing to

1. the Government being ahead of their borrowing program for the fiscal year 2016/2017, and
2. (ii) the enactment of the Banking Act Amendment 2015 that has resulted in lower lending rates by commercial banks and preference of the less risky Government instruments. The next bond issue will be dated 24th October 2016 with the specific features of the issue to be provided in the prospectus before the issue date as the CBK is yet to provide the Security Issuance Calendar for the second quarter of the 2016/17 fiscal year.

The Central Bank Weekly report revealed that the interbank rate declined by 20 bps to 3.2 percent from 3.4 percent the previous week despite a liquidity reduction of Kshs 2.3 bn. The liquidity reduction was as a result of tax payments by banks, T-bill primary issues and reverse repo maturities of Kshs 28.4 bn, Kshs 21.6 bn and Kshs 1.8 bn, respectively. 

The interbank rate is often determined by the liquidity distributions within the banking sector as opposed to the net liquidity position in the interbank market. With the average interbank rate at 3.2 percent and the reverse repo rate at 10.5 percent, it is clear from the Kshs. 1.2 bn reverse repo purchases that there are players who cannot access liquidity from their peers in the interbank market and have to resort to expensive liquidity sources from the Central Bank.

Read: We need to invest more in Africa’s most precious resource, and that is its people –POTUS