T-Bill Subscription Dips Below 50% As Covid-19 Continues To Bite

During the week, T-bills were undersubscribed, with the subscription rate coming in at 35.6 percent, down from 112.7 percent the previous week.

The undersubscription of the T-Bills during the week was partly attributable to the IFB1/2020/9 bond sale in the primary market that closed during the week, coupled with tightening liquidity in the money market as evidenced by the interbank rate, which increased to 5.3 percent from 5.2 percent the previous week.

The subscription rate of the 91-day, 182-day, and 364-day papers declined to 14.3, 16.3, and 63.4 percent respectively, from 22.7, 46.3, and 215.1 percent the previous week, respectively.

The yields on the 91-day, 182-day, and 364-day papers all remained unchanged at 7.2, 8.1, and 9.0 percent respectively, similar to what was recorded in the previous week.

The acceptance rate declined marginally to 99.3 percent from 100.0 percent recorded the previous week, with the government accepting 8.46 billion shillings of the 8.53 billion shillings bids received.

During the week, the Central Bank of Kenya released the auction results for the newly issued infrastructure bond, IFB1/2020/9 with an effective tenor of 9.0-years and a coupon rate of 10.9 percent, in a bid to raise 60.0 billion shillings for funding of infrastructure projects in the FY’2019/20 budget estimates.

READ: T-Bills Dominate Week 1 Of March With An Oversubscription

The bond was oversubscribed, with the government receiving bids worth 68.4 billion shillings higher than the quantum of 60.0 billion shillings translating to a subscription rate of 114.0 percent.

The high subscription as per our expectation was mainly attributable to its short tenor as well as the tax-free incentive for infrastructure bonds, translating to a higher return.

However, as per the proposals from the Tax Laws (Amendment) Bill, 2020, going forward, securities used to raise funds for infrastructure and other social services with tenors of at least 3-years will now be subject to 10.0 percent withholding tax, just like the other normal bonds.

The introduction of the tax is set to remove the single most distinctive and attractive feature of these bonds, which will also mean that the State may be forced to pay higher interest on the papers to compensate for the tax levy.

The yield on the tax-free bond came in at 12.3 percent with the government accepting 39.0 billion shillings out of the 68.4 billion shillings worth of bids received, translating to an acceptance rate of 57.0 percent.

READ: T-Bills Under-subscribed For The Second Week In A Row