A Look at April Bond Auction: Treasury Targets to raise 50 Billion Shillings

The fiscal agent seeks to raise 50.0 billion shillings in the month of April bond issue according to stats compiled by Genghis Capital in the dual-tranche issue of 10-year and 20-year tenors.

The coupon for the two tenors will be determined at the auction to be held this Wednesday 10th April 2019. Although the month’s primary bond is earmarked towards budgetary support, this month has twin bond redemptions that deserve some scrutiny.

FXD1/2008/10 and FXD1/2014/5 with a cumulative 53.2 billion shillings are maturing on the 15^th and 22^nd April, respectively.

Currently, net domestic borrowing is slightly ahead of the curve at 255.1 billion shillings (against 244.5 billion shillings pro-rated target) as at the end of last week.

“Thus as borrowing pressure has slightly abated, we opine that the bond proceeds will mainly be towards refinancing the maturing obligations,” said experts from Genghis Capital.

The macro-economic environment remains broadly stable although with a downside bias. The high-frequency indicators are telling of potential growth headwinds.

Purchasing Managers Index (PMI), a proxy for private sector sentiment, showed a second consecutive month of a slowdown in March with a 51.0 print.

Demand pressure in the economy remains muted as indicated by the sub 3.0 percent reading of March core inflation and partly by the narrowing of the Current Account Deficit to 4.7 percent in February 2019 from 5.5 percent in February 2018.

On the fiscal side, revenue underwhelmed by 15.2 percent its prorated target as at February and there exists broad-based lower-than-expected government spending. An amalgamation of these indicators, coupled with the anemic private sector credit growth, signal sluggish consumption in the overall economy. As such, we expect yields on the new issues to be sticky within current levels.

The prevalent economic uncertainty has weighed upon long-term investment mandates. The demand overhang in the market which has been towards the short-term papers and with a dearth in supply has buoyed the uptake of T-Bills.

“We note that T-Bills have averaged 165.8 percent subscription rate in 2019; uplifted by the uptake in 364-day tenors (244.3% subscription rate),” added Genghis.

Not to sound like a broken record, the controlled interest rate environment has not been supportive of the long-end issues as the yields remain less attractive against their tenors.

“Thus, we believe the 20-year tenor will attract lower quantum bids as opposed to the 10-year tenor. The average yield on the historical 3-year horizon has averaged 13.17 percent and 13.54 percent on the 10-year and 20-year, respectively,” they added.

The yields averaged 12.14 percent and 12.71 percent on the on-the-run issues, respectively, at the end of last week.

“Overall, our sentiment is that FXD2/2019/10 will average 12.25 – 12.45 percent while FXD1/2019/20 will average 12.75 – 12.95 percent.”