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Investors set to snap up 15-year bond

BUSINESS
By By Kevin Mwanza and Reuters | September 19th 2012

By Kevin Mwanza and Reuters

Investors are expected to pile into a 15-year bond issue today, the country’s first offering of long-term debt in more than a year, as they seek to lock in yields, which are falling now that inflation and interest rates are declining.

The sale is expected to confirm that the yield curve has returned to normal after short-term yields fell below long-term yields last month.

Analysts expect strong demand from fund managers and insurance firms from the sale of the 15-year bond and see the weighted-average yield falling to 10-11 per cent.

At the last 15-year bond auction in April last year the yield rose to 12.388 per cent, from 10.923 per cent previously.

The Central Bank of Kenya, which has rationed long debt securities since the middle last year as it waited for yields to fall further, plans to sell up to Sh15 billion ($178 million) of the 15-year issue, with a fixed coupon rate of 11 per cent.

Food supply
“The market is very liquid and investors will be bidding cautiously (lower rates). We expect high subscriptions from funds and insurance investors,” said Caleb Mutai, a fixed income trader at Tsavo Securities.

“The yield curve is changing from the inverted position we saw last year. It will correct further as yields on the lower end keep falling.”

For the past year, yields at the short end of the curve had been above those of long-term paper as inflation soared, reaching nearly 20 per cent in November last year.

Yields have since come down after the Central Bank of Kenya adopted an aggressive tightening stance and reined in inflation.

Falling inflation has prompted the bank to cut interest rates since July to support the economy, putting further pressure on yields.

Food supply
The benchmark 91-day T-bill yield has dropped from a high of 20.8 per cent on January 19 to 7.5 per cent at a sale last week.

Interest in the 15-year bond issue is likely to distract investors from T-bill sales this week, analysts said.

“Investors are looking for medium to long-term investments, that’s why we expect the yield on the 91- and 182-day bills to stabilise because investors will be focused on the 15-year bond,” said Ronald Lugalia, a research analyst at Afrika Investment Bank.

“It’s a timely move by the central bank to offer the paper now after inflation has fallen significantly,” he said.
 

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