Market correction sees slight surge in Treasury bill, bond rates

Interest rates might have bottomed-out, but the cost of Government borrowing last week edged slightly, dashing prospects of even cheaper credit.

Average rates on the 182-day security edged up by 54 basis points to 11.099 per cent, while the 364-day bill rose 34 basis points to 12.56 per cent, ending the Government-induced slowdown in the cost of credit.

The Government received only Sh22.5 billion against a target Sh42 billion offered in three different maturities, including a 9-year infrastructure bond.

But even with the rise in interest rates, investors shied away from lending to the Government with analysts attributing the uptick to market correction.

“Investors are looking at shorter-term securities in anticipation of even higher interest rates,” said one finance manager of an investment advisory firm.

The rise in the Government’s borrowing rates is a sure signal to a higher cost of credit in the financial market.

The emerging trend comes at a time when the Government is committed to bringing down the interest rates by cutting on its borrowing from the domestic markets, after the benchmark rates rose above 22 per cent in September and October.

Commercial banks promptly adjusted the interest rates on loans to consumers and other borrowers, pushing the State to intervene.

Several banks are yet to lower their lending rates, ignoring pleas by the Central Bank of Kenya (CBK), citing that there was still instability in the financial markets as interest rates were still volatile.

The rates would fall steadily in the subsequent weeks, to below 10 per cent for the short-term securities until this week.

National Treasury Cabinet Secretary Henry Rotich said at the time that the State would seek alternative sources of borrowing, including borrowing from international commercial banks.

But the measures taken may not be effective any longer if the rise in interest rates is sustained in upcoming borrowings by the Government.

Of the three issues on sale this week, the 182-day Bill got the best reception at 95 per cent of the target amount – which was still undersubscribed.

Investors offered only Sh2.7 billion in the 364-day security, which was anticipated to raise Sh6 billion, translating to a 45 per cent success rate.

The State had hoped to raise Sh30 billion through the infrastructure bond but investors advanced only Sh16.5 billion, just above the half-way mark.

Still, the State accepted only Sh13.9 billion in the infrastructure bond whose average yield is just shy of 15 per cent.

The cost of Government borrowing acts as the benchmark for all other lending, including the rate at which banks grant loans among themselves, and to ordinary borrowers.