Fixed-income investors are scrambling for Treasury bills and cutting their appetite for Treasury bonds, hoping returns on government paper will increase and force the state to rely on short-term borrowing.
Three of the last four Treasury bill auctions have been oversubscribed. In contrast, bond auctions in May and June underperformed, reflecting the switch to shorter government paper as investors bet on the rates increasing.
Investors often avoid locking funds in long-dated papers such as bonds if they expect interest rates to rise, favouring the 91-day Treasury bill instead.
The shift comes ahead of the Central Bank of Kenya (CBK) policy meeting on Tuesday, which is expected to signal the general trend of interest rates in the coming months through the benchmark rate – which was frozen for the first time in April since June 2024.
‘As much as an investor has liquidity, one wants to restrict their tenure to the short end when there are expectations that yields will go up,’ said Christine Gatakaa, the Head of Fixed Income Trading at Capital A Investment Bank.
‘You don’t want to be underwater in a few weeks or months.’
Treasury bills were two times oversubscribed last week as investor bids topped Sh54.5 billion against a target of Sh24 billion.
The 91-day Treasury bill, the shortest tenure paper, marked the highest investor bids at Sh32.8 billion against a target of Sh4 billion.
T-bill subscriptions recovered from Sh16.6 billion in the previous week, affirming adequate liquidity in money markets even as investors wait for more signals on the interest rates direction.
‘The sharp recovery in demand suggests ample market liquidity and renewed investor appetite for government securities, as investors seek to lock in attractive yields amid rising inflation expectations and uncertainty surrounding the near-term interest rate outlook,’ analysts at AIB-AXYs Africa, an investment bank, said.
Returns on the shortest-dated government securities have risen since the start of April, mirroring the reversal in interest rates.
The 91-day T-bill return jumped from 7.4261 percent at the end of March to 8.5588 percent at present while interest rates on the longer-dated 364-day Treasury bill have grown to 8.7629 percent from 8.2815 percent over the same period.
Subscriptions on longer-dated Treasury bonds have underperformed in the past month, underlining falling demand for the high tenured securities as investors look to short-dated instruments.
The 15 and 25-year reopened bonds that sold this month, for instance, registered an 85.97 percent performance rate on Sh34.3 billion bids against a target of Sh40 billion.
Previously, two re-opened bonds – a 15 and 20-year paper – marked a subscription rate of 94.32 percent on Sh471.1 billion bids, against a target of Sh50 billion.
A 20-year Treasury switch bond issue also missed the mark, posting a performance rate of 76.14 percent on Sh7.6 billion bids received, but against Sh10 billion on offer.
The CBK, which serves as the National Treasury’s fiscal agent, faces the hard task of meeting the government’s domestic borrowing target while keeping interest payouts in check.
The bank is expected to ditch longer-dated securities for short-term issuances to ensure the government can meet its target even as payments to investors rise.
CBK has in the past indicated that it would rather pay high interest rates on short-term papers than offer premium payouts for longer durations.
‘CBK will have to yield to investor demands for higher rates if it is to hit borrowing targets. I expect to see switch bond auctions from longer-dated instruments to shorter-tenured papers. We have seen a lot more traction on bonds with tenures of less than five years in the secondary market, which informs where investor appetites are,’ Ms Gatakaa said.
Net domestic financing for the financial year starting July 1 is already expected to top Sh995.7 billion as Treasury bets on local credit markets to plug a Sh1.1 trillion budget deficit.
The US-Israel war on Iran is expected to have an impact on economic growth and revenue mobilisation.