A Look at the Markets, Liquidity, and T-Bills During the Week

As the week comes to an end, the Central Bank of Kenya (CBK) confirmed the auction of a new five-year paper – FXD2/2017/5 – with an offer amount of 30 billion shillings. The initial proposal was also to re-open the FXD1/2016/20 as well but this has been shelved off.

The supply overhang in the 4yr-7yr tenors is significant and with a five-year bond issue just concluded in August together with a TAP Sale shortly thereafter, with analysts seeing a subdued appetite for this specific bond.

On the other hand, liquidity has been constrained due to a slowdown in government spending ahead of the October 26^th election. On a best-case scenario, if the election is concluded successfully we should see the taps from Treasury open and a rush to meet allocation targets which have fallen behind.

This, in turn, will put pressure on institutional investors led by banks to find a home to deploy excess liquidity possibly piling downward pressure on rates on the shorter end of the yield curve in the short term.

Secondary market activity slowed down on Thursday to 1.58 billion shillings still driven by trades on the long end. With the proposed FXD1/2016/20 now shelved, market analysts expect sustained demand on long-term issues.

The local unit closed stronger yesterday at 103.20 with some intervention from the regulator but on minimal amounts, it is expected to end the week at below 103.30. The regulator sat out of the repo market yesterday citing a square market. The overnight rate remains elevated above 8%.

The T-Bill auction held this week continued to register underperformance largely due to the constrained money market. The CBK received bids worth 15.16 billion shillings and accepted 13.1 billion shillings against an offer amount of 24 billion shillings. The T-Bills remained stagnant at 8.13, 10.31 and 10.97 percent for the 91-day, 182-day and 36- day, respectively.