Investors have piled into the shortest-dated Treasury instrument-the 91-day T-bill-on the expectation that rates will begin to move higher as inflationary pressures re-emerge.
The sale of Treasury bills as leaned towards the shortest dated instrument, where the 91-day paper has received the highest bids from investors in at least the last two auctions.
The 91-day Treasury bill received bids worth Sh49.7 billion and Sh50.2 billion in the prior two weeks in contrast to bids of Sh12 billion and Sh15.5 billion for the 182-day paper, Sh6.6 billion and Sh9.6 billion for the longest dated 364-day T-bill.
Investors favour shorter tenures during periods when interest rates are expected to rise, avoiding locking up funds over long durations during which returns would increase.
The bias for the shortest dated securities helps mitigate duration risks, allowing investors to deploy their funds into higher yielding instruments within a short time duration.
On the flipside, investors will pack funds into longer dated instruments when they expect rates to fall. Higher domestic fuel prices have rekindled inflationary pressures, forcing analysts to begin pricing in the chance for an increase to the benchmark lending rate by the Central Bank of Kenya (CBK) at the December monetary policy committee (MPC) meeting.
‘We continue to hold our position that the (91-day) paper will remain an investor favourite, owing to ongoing inflationary pressures, which are expected to keep rates higher in the near term,’ analysts at AXYS Investment Bank said in a research note.
‘We expect the October pump prices to flare up inflation in the four quarter.’
Higher fuel prices from the US-Israel-Iran conflict have piled pressure on local pump costs along with new supply shocks on processed food items like wheat flour and milk. September inflation climbed to 6.8 percent from 6.6 percent in August, but changes in consumer prices have remained below the upper limit of 7.5 percent-a target for CBK.
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The monetary authority has struggled to project inflation based on the shocks, but it expects the rate to stick below the target in the next 12 months.
Returns from Treasury bills have defied the rebounding inflationary pressures, having fallen further, touching 8.75 percent for the 91-day Treasury bill last week, from a higher 8.82 percent in June this year.
The weighted average interest rates on accepted 91-day Treasury bids has been on a downward trajectory over the last one month while returns on the 182-day T-bill have fallen in the last nine consecutive weeks.
Returns on the longer-dated 364-day paper rose by a slight 0.0031 percent last week, ending a five-consecutive week slump.Other domestic interest rates have followed a similar trajectory with average commercial bank interest rates easing, while the interbank lending rate has remained unchanged at 8.75 percent, the same rate as the Central Bank Rate (CBR), signalling sufficient liquidity in the money markets.
The fall in domestic credit rates against new cost pressures has been tied to continued monetary policy transmission from prior policy easing decisions, even after the CBK paused adjustments to its benchmark rate in February.
The current monetary policy stance has been viewed as accommodative in anchoring inflation expectations and supporting economic growth, as private sector credit growth touched a multi-year high of 10.6 percent last month.
The CBK left its benchmark rate unchanged for the fourth consecutive time as it maintains a wait and see stance on the evolution of consumer prices.
Last week’s increase in maximum retail prices, where super petrol rose Sh12.93 per litre, diesel Sh9.90 and kerosene Sh28.49 per litre is expected to stoke further inflation, with the printed rate likely to surpass CBK’s projection of 6.9 percent for October.
Analysts who previously expected a surprise CBK rate increase this month have maintained their predictions that the monetary authority will likely tighten the policy rate in December.
‘We had earlier noted that the MPC could consider a rate hike at its coming meeting. This view has become more relevant following last week’s increase in pump prices,’ added analysts at AXYS Investment Bank.
‘We expect the higher pump prices to feed into the wider economy, raising transport costs and, in the near term, food prices as production costs climb. Businesses are also likely to gradually pass on their higher operating costs to consumers, setting off second-round effects that will keep inflation elevated.’