Investors shun State bonds on poor returns

Central Bank of Kenya Governor Patrick Njoroge. [Photo: Courtesy]

Investors are watching how the standoff over the new tax measures and the budget cuts by the Government play out to gauge its appetite for debt, going by recent bond auction figures.

The bond auction on Tuesday received a rate of 81.1 per cent, with the 10-year and 20-year re-opened bonds that sought to raise Sh40 billion receiving bids worth Sh32.5 billion.

However, these results stand out from the bonds’ previous performance. For instance, the 20-year bond only got only 25 per cent of investors’ attention or Sh10 billion, while the 10-year one realised Sh22 billion or a subscription rate of 55 per cent.

“The results were above our 75 per cent prediction as stated in our September fixed income report released last week. However, the auction is a reflection of bond auctions this calendar year, with investors showing a high preference for shorter-term bonds,” said the Sterling Capital research team.

Fiscal deficit

The investors were, however, only trying to get the best returns given the limitation of the interest rate cap, but CBK would have none of it, accepting only Sh26 billion.

The market priced the 10-year bond at a coupon rate of 12.669, while CBK accepted a rate of 12.665. As for the 20-year paper, it was priced at a rate of 13 per cent, but CBK accepted a rate of 12.9 per cent.

“The market still wants to understand the fiscal deficit and what will come out of Parliament today (Thursday) to gauge if the taxes are realistic and applicable,” said Jibran Qureishi, Stanbic Bank Regional Economist for East Africa.

CBK has been trying to take advantage of the comparatively lower yields by issuing longer-dated debt securities as was the case in February and July this year when it issued one for 20 years and another one in June for 25 years.

Public debt sustainability

However, these issues were significantly undersubscribed, with investors preferring to invest in the shorter-term Treasury-bills.

Sterling Capital attributed this scenario to investors’ expectations of a repeal of the law capping interest rates or an upward adjustment in the third or fourth quarter of the 2018/19 financial year that would likely result in an increase in yields.

Overall, the recent performance was better than previous bonds which have recorded dismal results. Mr Qureishi said the market is awash with cash and since the rate cap is here to stay, CBK may have leverage going forward. There is also growing uncertainty over the sustainability of public debt over the long-term, with debt as a proportion of the country’s Gross Domestic Product (GDP) expected to cross over 60 per cent in the medium-term.