‘Poor Strategy’ For Treasury to Reopen Eighth Bond Tap Sale – Analysts

Kenya’s secondary market trading is expected to be subdued with the issuance of a Tap sale on the December Treasury bond auction given the low uptake.

According to market analysts, the reopening of the FXD1/2008/15 and FXD1/2017/10 in a Tap Sale was ‘a poor strategy considering the focus by banks on their balance sheets at the moment to shore up numbers before the close of the year as well as most investors preferring to close out until January.

“We, therefore, expect poor subscriptions. Re-opening in January would have offered a better timing when focus would have shifted to deploying funds,” noted Genghis Capital Analysts Daily Brief issued on Monday.

The Treasury bond auction in December underperformed with the Central bank receiving bids worth KES 21.89Bn against the KES 30.00Bn on offer for the re-opened two bonds, a 15-year (FXD 1/2008/15) and a 10-year (FXD 1/2017/10) with effective tenors of 5.3 years and 9.6 years and coupons of 12.5 percent and 13.0 percent, respectively.

“Despite being undersubscribed with a subscription rate of 73.0 percent, the low acceptance rate of 45.9 percent is an indication that the government is not accepting expensive money despite remaining behind target in its borrowing,” according to Cytonn Analysts.

“This has resulted in Treasury issuing Tap Sales on eight (8) occasions this year — the highest number of Tap Sales in any given year! Notably, majority of the Tap sale issues were between 1 and 5 years to maturity raising concerns about the concentration of the maturity profile of sovereign debt,” notes Research Economists from the Commercial Bank of Africa Limited.

“Intuitively, the Tap sales, following the rejection of aggressive bids, could be the government’s way of taking advantage of the lack of alternative return generating investments in the market following the lull in private sector credit and the general lethargy in economic activity,” they add.

The TAP Sale will run up until 28th December seeking to raise KES 20.00Bn on the two bonds. Auction results will be published on 29th December 2017.

Currently, the government has exceeded the first quarter of the FY’2017/18 spending targets for both recurrent and development expenditure at 102.4 percent and 102.9 percent absorption rates, respectively, which may trigger increased domestic borrowing to meet expenditure requirements.

“The tepid demand for government papers does not bode well for the government’s budget plans and hefty debt maturities in the coming months. That said, the government continues to lag behind its domestic debt target having only raised KES 66.39Bn through Treasury bill and bond issues. The fiscal body may therefore, focus its efforts on lowering its debt financing cost and rolling over debt maturities in an effort to ease the debt burden amid increasing spending needs,” according to CBA Analysts.