This is what an overpriced Treasury bond costs Government

If the Central Bank of Kenya (CBK) accepted just one percentage point extra in interest on the Sh40 billion infrastructure bond advertised recently, this is enough to cost taxpayers a whooping Sh400 million in interest.

The market overpriced the bond and responded with Sh55 billion worth of credit demanding an average of 13.026 per cent for the 15-year security.

However, CBK only accepted bids at a rate of 12.505 per cent which saw it cherry pick Sh5 billion, less than 10 per cent of what was put in the auction.

So crucial is the pricing of a bond or a bill since Kenya has a Sh2.2 trillion local debt so every percentage point costs Sh22 billion in interest.

The government has left this crucial job of saving Kenya costly debt to the Central Bank of Kenya which earns Sh3 billion agency fee to fix the rate, run an auction and pick up the debt.

A bank Treasury source familiar with the process says the way Kenya does its debt structuring is broken with the National Treasury only coming in at the end of the process. “CBK may have some officials but sometimes, it seems they are so disconnected with the market, for instance, while infrastructure bonds were trading at the secondary market at around 11 per cent, they set the coupon at 12 per cent,” the source said.

“When you do that you are sending a signal to the market that you are willing to pay very generously which means you really need money,” the source added.

According to the source, the National Treasury debt department is severely understaffed with only one officer handling repayments for the Sh4.5 trillion national debt.

Financial Standard also established recently that Treasury and CBK were not on the same page regarding Treasury Bills after it emerged that CBK policies are piling debt on the short-term reducing maturities from 11 years to six years just between 2016 and now.

Higher yield

This year alone, Kenya is facing Sh850 billion in maturing local loans according to data seen by the Financial Standard, almost half of Kenya’s local debt.

“Investors want high yields. And our yield curve isn’t too bad the yield curve of 15 years 20 years isn’t bad actually but we have a stickiness in the short end, this is where the problem is,” said Kenya Commercial Bank Chief Executive Officer Joshua Oigara.

A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time.

However, in Kenya, short-term Treasury bills have become so lucrative that investors piled all their money on the quickly maturing debt and abandoned long-term securities.

According to the latest CBK auction results, if you give the government money for three months, it will pay you eight per cent.

If you give it money for half a year, you will earn 10.5 per cent making the 182-day Treasury bill the most attractive.

If you lock your money for a whole year, you only get 11.1 per cent which is a 0.5 percentage points difference for the extra six months.

If you give the State money for 20 years, you will get 13 per cent which is just 2.4 percentage points more for 19 years and a half months.

In fact KCB, the biggest lender in the country by assets and which holds Sh60.79 billion of government debt had put in Sh6 billion in the Infrastructure bond.

When the market rate was rejected, KCB took Sh5 billion to the Treasury-Bills issue and bought short-term debt.

Mr Oigara said this does not necessarily mean the long-term debt market is dead but that the government may rely more on pension funds.

“I don’t think the long-term bond market is dead because the way people bring in money, the biggest players are pension managers and trustees are looking for long-term options for their investments,” KCB Chief Executive Officer Joshua Oigara said.

Banks hold more than half of government debt, at 55 per cent in January while pension funds held only 27.3 per cent.

Even as CBK Governor Patrick Njoroge said in Davos, Switzerland that Kenya plans to hold an investor roadshow mid-this month to promote a planned Eurobond issue, he had warned that national debt was teetering dangerously towards unsustainability.

Dr Njoroge said even though he sees the current public debt level as sustainable, it could become difficult in future to depend on borrowing to finance huge infrastructural projects.

“The issue is that the room for borrowing to finance such projects is obviously narrowing. We need to have alternative ways of financing these projects,” he said.

This will require more efficient planning and execution, to tighten the government belt, cut local rates on bills and bonds and have the capacity to negotiate if it comes to the point of default and restructuring.

Treasury needs more planning technocrats, no wonder that President Uhuru Kenyatta appointed Julius Muia as Planning Principal Secretary nominee and brought him to the Department of Treasury.