T-Bill Auctions Were Oversubscribed in January at 187.7%

During the month of January, T-bill auctions recorded an oversubscription, with the overall subscription rate coming in at 187.7 percent, an increase from 60.9 percent recorded in December.

The subscription rates for the 91-day, 182-day, and 364-day papers came in at 173.0, 141.0 and 240.2 percent from 112.3, 39.7 and 61.6 percent in the previous month.

The yields on the 91-day and 182-day papers both declined by 0.2 percentage points, to 7.1 and 8.8 percent from 7.3 and 9.0 percent respectively.

The 364-day declined by 0.1 percentage points to 9.9 percent from 10.0 percent recorded in December according to stats compiled by Cytonn Investments.

The Acceptance Rate

The T-bills acceptance rate came in at 66.8 percent during the month, compared to 87.4 percent recorded in December with the government accepting a total of 120.4 billion shillings of the 180.2 billion shillings worth of bids received.

The Central Bank of Kenya (CBK) remained disciplined in rejecting expensive bids in order to ensure the stability of interest rates.

T-Bill Subscription Last Week

During the week, T-bills remained oversubscribed, with the overall subscription rate coming in at 167.4 percent down from 170.2 percent recorded the previous week attributed to a favorable liquidity condition in the market.

The yields on the 91-day, 182-day, and 364-day papers declined by 0.6, 0.5 and 0.5 percentage points, to 7.1, 8.8, and 9.9 percent respectively.

The acceptance rate rose to 80.5 percent from 65.0 percent recorded the previous week, with the government accepting 32.3 billion shillings of the 40.2 billion shillings worth of bids received, higher than its weekly quantum of 24.0 billion shillings.

The subscription rate for the 91-day and 182-day declined to 59.7 percent and 81.0 percent from 123.8 percent and 107.3 percent respectively.

The subscription rate for the 364-day paper improved to 296.9 percent from 251.7 percent recorded the previous week, as the paper offers better risk-adjusted returns to investors.

The 91-day T-bill is currently trading at a yield of 7.1 percent, which is below its 5-year average of 9.0 percent.

The lower yield on the 91-day paper is mainly attributable to the low-interest-rate environment that has persisted since the passing of the law capping interest rates.

The discipline of the CBK in stabilizing interest rates in the auction market by rejecting aggressive bids that are priced above market, for both T-bills and T-bonds, and the maintaining of the CBR at 9.0 percent by the Monetary Policy Committee in their January meeting will continue strengthening T-Bill subscription.

Government Bonds in January

During the month of January, the Kenyan Government issued two bonds; issue number FXD 1/2019/2 and issue number FXD 1/2019/15, with tenors of 2.0-year and 15.0-year, both with market-determined coupon rates.

The government was seeking to raise 40.0 billion shillings from the two bonds for budgetary support.

The two bond issues were over-subscribed with an overall subscription rate of 254.9 percent with bids worth 102.0 billion shillings received against the 40.0 billion shillings on offer.

The 2-year bond had a better performance with total bids of 76.9 billion shillings compared to 25.1 billion shillings worth of bids for the 15-year bond, an indication of the high demand in the shorter-end of the yield curve.

The government accepted 38.5 billion shillings out of the 102.0 billion shillings worth of bids received against 40.0 billion shillings on offer, translating to an acceptance rate of 37.7 percent indicating that bids were largely not within ranges the CBK deemed acceptable.

The average accepted yield for the 2-year and 15-year issue came in at 10.7 percent and 12.9 percent respectively.

“This was within the target of our expectation of between 10.7 – 10.9 percent and 12.6 – 12.9 percent for the 2-year and 15-year bonds, respectively,” said Cytonn Investments.

The Government has re-opened the two bonds with the coupon rates set at 10.7 percent and 12.9 percent for the 2-year and 15-year bond, respectively, in a bid to raise 15.0 billion shillings.

Treasury bonds with the same tenor (2.0-years and 15.0-years) are currently trading at a yield of 10.6% and 12.7 percent respectively.

“We expect bids to come in at between 10.6 – 10.8 percent and 12.7 – 12.9 percent for the 2-year and 15-year bonds, respectively,” said analysts from Cytonn Investments.

Appetite for Long-Term Bonds

Despite the Government’s effort of issuing longer-term bonds in a bid to lengthen the debt maturity profile and reduce the potential rollover risks in the medium term, it is evident that there is a low appetite for the long-dated papers.

This is attributed to the saturation of long-end offers, leading to a relatively flat yield curve on the long-end, making Treasury rely on the short-term treasury bills to meet its domestic borrowing target.

“We are of the view that the Government will need to offer more incentives for the long-term bonds by increasing the yields to attract investors,” said Cytonn.

The yields on government securities in the secondary market remained relatively stable during the month of January as the Central Bank of Kenya continued to reject expensive bids in the primary market. According to the FTSE NSE Bond Index, Treasury bonds listed at the Nairobi Securities Exchange (NSE) gained by 0.2 percent during the month, bringing the YTD performance to 0.2 percent.