Month of January Characterized by Low Treasury Bill Subscriptions

The month of January was characterized by low Treasury bill subscriptions with overall subscription decreasing to 68.5 percent from 105.0 percent in December on account of tight liquidity in the money market according to a report released by Cytonn Investments.

Despite the low subscription rates during the month, the government remained disciplined by rejecting expensive money from the market as can be seen by the decline in the monthly average acceptance rate which came in at 78.0 percent of the total bids received compared to 84.0 percent in December.

Yields on T-bills were relatively unchanged during the month of January, closing at 8.7, 10.5 and 10.9 percent respectively from 8.6, 10.5 and 11.0 percent respectively for the 91, 182 and 364-day papers, respectively at the end of December.

During the month, investor preference shifted more towards the shorter-term paper, with the 91-day T-bill receiving higher subscriptions averaging 95.3 percent as compared to 69.5 percent and 44.9 percent for the 182 and 364-day papers respectively.

During the week, T-bills were oversubscribed, with overall subscription coming in at 167.4 percent compared to 76.6 percent recorded the previous week with the subscription rate on the 91-day T-bill decreasing to 93.4 percent from 146.0 percent the previous week whereas those on the 182 and 364-day papers increased to 255.6 percent and 128.6 percent from 84.6 percent and 22.3 percent respectively the previous week.

The oversubscription during the week sees a 5-week run in which T-bills were undersubscribed come to an end and can be attributed to investors who were turned down last week in the cancelled bond auction and are now looking for investment opportunities in the T-bill market.

Despite the rise experienced in subscription levels during the week yields on the 91, 182 and 364-day T-bills remained relatively flat, coming in at 8.7, 10.6 and 10.9 percent respectively from 8.7, 10.5 and 10.9 percent respectively the previous week. The 182-day paper continues to offer the highest return on a risk-adjusted basis, as evidenced by the higher subscription levels on the paper during the week.

The 91-day T-bill is currently trading below its 5-year average of 10.0 percent. The lower yield on the 91-day paper is mainly attributed to the expected low interest rates environment following:

1. The operationalization of the Banking (Amendment) Act 2015, which has led to investors channeling funds more actively towards government securities.
2. Reduced pressure from the government borrowing program as they are currently ahead of the pro-rated domestic borrowing target of 141.3 billion shillings having borrowed 157.0 billion shillings which is 111.1 percent of the pro-rated target.