Interbank Rate Stable at 6.84pc in the Week

Money Market

The market was liquid in the week. This should impact the auction positively as investors are likely to be more inclined to focus on securing allocation over superior yield. The interbank rate was stable at 6.84% in the week. Traded volume cratered to KES 51.91Bn (from KES 82.44Bn) in the week. We are likely to witness depressed liquidity levels on account of the statutory corporate tax payments to be met early this week.

Secondary market turnover declined 38.46% to KES 3.91Bn in the week. The depressed activity was attributed to the upcoming

February primary auction with investors adopting a wait-and-see approach as well as aggressive open market operations.

Trades were centered majorly on the infrastructure bonds and on the long end of the yield curve; with the top 5 traded bonds accounting for 70.68% of the week’s total turnover. Demand was also large on the short-to-medium tenors albeit elevated bid yields measured against supply that was available. Infrastructure bonds and Treasury bonds commanded 52.64% and 46.95% (respectively) of the week’s trading activity. Number of deals narrowed to 95 from 253 in the prior week.

Prime Rates

Yields on the 91-day and 364-day tenors declined 2.50 and 0.10 bps (respectively); whilst there was 0.30 bps increase in the yields of the 182-day tenor. The 182-day tenor still continues being attractive in comparison to the 364-day; pushing its auction performance past the 300% level. The slight uptick in the yield was propelled by investors’ expectation of increased government borrowing. The subscription on the 91-Day posted a subpar performance at 37.76%; showing a lagged effect of the more active repo market that weighed down on the discounted security. Overall, T-bill uptake increased to 182.50% from the 172.06% recorded in the prior week. We anticipate an extended positive performance on the 182-day tenor on heightened government borrowing amidst the heavy maturities that are due this month.

Currency

The shilling ranged in a narrow band this week (103.65 – 103.70) against the US dollar. There was reduced dollar demand from the importers whereas the dollar strengthening in the week’s terrain due to hints of a March rate hike and also on the positive economic releases in the nation. Foreign exchange reserves at CBK improved by USD 7Bn (KES 7.23Mn) in the week, to end at USD 6.95Bn (KES 720.47Bn), equivalent to 4.59 months of import cover.

Primary Auction Outlook IFB1/2017/12yr:

This month’s bond issue – IFB1/2017/12yr – is a twelve-year maturity with KES 30Bn geared towards partial funding of infrastructure projects in roads, energy and water sectors. The infrastructure bond issue was most likely arrived at i). Due to its tax-exempt appeal and ii). To tap into higher foreign inflows. We also note that there is a KES 23.59Bn bond maturing this

Monday as well the amortization of 40% paid out the previous week on the IFB1/2009/12; further deepening the net borrowing position against the domestic borrowing budget hence necessitating the need to roll over the maturities into the issue.

The 12-year historic average in the last two years has been 13.8622%. However, market sentiment on this auction has been between 13.40% -13.80% levels for the expected average accepted yield. This is in-line with our views driven mostly by the strong signaling effect coming from the National Treasury to manage the rates. We are however, sufficiently confident that there will be a tap sale of the same issue in the near future.

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