T-Bills Undersubscribed As Government Revises Domestic Borrowing Upwards

During the week, T-bills were under-subscribed, with overall subscription coming in at 72.7 percent, compared to 106.4 percent recorded the previous week according to data contained in Cytonn Investments Report.

The decrease in subscription levels for Treasury bills can be attributed to investors directing their bidding towards the 2-year Treasury bond on offer, which received subscriptions of 118.5 percent.

Subscription rates on the 91, 182 and 364-day paper came in at 64.7, 124.1 and 26.6 percent respectively from 54.4, 125.8 and 121.8 percent respectively the previous week. The 182-day paper continues to offer investors the best returns on a risk-adjusted basis, reflected in its over-subscription. Yields on the 91-day and 182-day T-bills increased by 10 bps each to 8.5 and 10.6 percent from 8.4 and 10.5 percent recorded the previous week respectively, while the 364-day remained unchanged at 11.1 percent.

The 91-day T-bill is currently trading below its 5-year average of 10.4 percent. The lower yield on the 91-day paper is mainly attributed to the expected low interest rates environment following:

• The operationalization of the Banking Act (Amendment) 2015, which has led to more liquidity in the money market given reduced lending to the private sector.
• Reduced pressure from the government borrowing program as they are currently ahead of the pro-rated domestic borrowing target of 110.4 billion shillings, having borrowed 155.8 billion which is 41.1 percent above the pro-rated target.

Domestic Borrowing

The government is in the process of revising its domestic borrowing target upwards to 294.6 billion shillings from 229.6 billion shillings, which if passed by Parliament, will take the pro-rated borrowing target to 141.6 billion shillings, meaning that the government will still be ahead of the borrowing target.

The 2-Year Bond

Last week, the Treasury issued a 2-year bond to raise 30.0 billion shillings for budgetary support. Yield on the bond came in at 12.5 percent. The bond was oversubscribed at a performance rate of 118.5 percent with the market weighted average rate coming in at 13.1 percent, a much higher rate than the then 12.3 percent prevailing in the secondary market for a 2-year bond, with investors seeking 80 bps premiums over current yields, but government only accepting a 20-bps premium.

The government has previously displayed inconsistency by accepting higher yields in treasury securities auctions while forcing banks to reduce interest rates, as witnessed in the 15-year infrastructure bond auction where the government accepted a yield of 13.2 percent on a tax-free infrastructure bond, which equated to a 15.5 percent yield on an equivalent taxable bond, adjusting for the 15.0 percent tax rate, for a tenor of 11.25 years.