Last week, the average interbank rate decreased to 7.0 percent from 7.5 percent recorded the previous week according to analysts from Cytonn Investments.
The slight decrease in interbank rate pointed to improved liquidity conditions in the money market, supported by net redemption of government securities of 29.2 billion shillings.
Despite the slight improvement, the liquidity conditions have been tight in recent weeks, with the average interbank rate being elevated to 7.2 percent compared to the 2019 average of 3.9 percent.
The tightened liquidity in the past weeks has been attributed to government intervention in the repurchase agreements (repos) market offering attractive rates of about 8.9 percent resulting in increased competition for smaller banks chasing the excess liquidity.
The average volumes traded in the interbank market declined by 14.2 percent to 5.3 billion shillings from 6.2 billion shillings the previous week.
Fixed Income Market
Rates in the fixed income market have remained relatively stable as the government rejects expensive bids.
A budget deficit is likely to result from depressed revenue collection with the revenue target for FY’2019/2020 at 2.1 trillion shillings creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit.
“Despite this, we do not expect upward pressure on interest rates due to increased demand for government securities, driven by improved liquidity in the market owing to the relatively high debt maturities,” said Cytonn.
According to Cytonn, investors should be biased towards medium-term fixed income instruments to reduce duration risk associated with long-term debt, coupled with the relatively flat yield curve on the long-end due to saturation of long-term bonds.
According to Reuters, the yield on the 10-year Eurobond issued in 2014 remained unchanged at 5.6 percent during the week.
For the 2018 issues, the yield on the 10-year Eurobond also remained unchanged at 6.8 percent during the week, while the yield on the 30-year Eurobond declined by 0.1 percentage point to 8.1 percent from 8.2 percent recorded the previous week.
During the week, the yields on both the 7-year Eurobond and the 12-year Eurobond remained unchanged at 6.4 percent and 7.4 percent respectively.