T-Bills lose appeal as interest rate falls

By James Anyanzwa

Commercial banks are realigning their investment baskets towards long-dated Treasury bonds as market analysts forecast a downward movement in interest rates in the short-term.

The emerging trend is informed by the relatively high yields realised on bonds in primary auctions and the liquidity of the instruments.

"There is a lot of interest in the primary bond auction mainly because these debt securities are able to attract better yields than in the secondary market," says Joshua Njiru, fund manager, Madison Asset Management Company Ltd.

Expectations of a fall in interest rates pushes investors towards long-term debt instruments in view of the negative relationship between the bond prices and market interest rates. A decline in the rates often increases the value of the bond and vice versa.

"There are expectations that interest rates will go down," says Njiru.

Analysts peg the likely fall in interest rates to the slowed lending by commercial banks to the private sector and the poor performance of the equity market, which has seen investors seek safe havens in Government securities.

According to Central Bank statistics, the Government securities market posted mixed performance during the Treasury Bills and Treasury bonds auction of April 23. While the Government had offered for sale T-Bills worth Sh6 billion, it only received bids totaling Sh2.8 billion, of which Sh1.8 billion (or 67 per cent) were in 182-day T-Bills.

In the case of Treasury bonds, the Government offered for sale five-year and 10-year Treasury bonds worth Sh10.0 billion, and received bids totaling Sh16.8 billion.

weekly auction

The performance of the auction was, therefore, 45.0 per cent and 168.0 per cent for the T-Bills and Treasury bonds, respectively. Proceeds of the auction were to be used to meet the cost of rolling over T-Bills and Treasury bonds maturities totaling Sh3.6 billion in the week and provide the Government additional borrowing of Sh8.5 billion.

The proportion of Government securities held by commercial banks increased from 48.6 per cent in June last year to 53.3 per cent as at April 17. On the other hand, the proportion of Government securities held by pension funds, insurance companies, parastatals, building societies and other investors decreased from 27.4 per cent, 12.5 per cent, 0.5 per cent and 1.5 per cent respectively to 26.2 per cent, 12.0 per cent and 0.4 per cent and 1.1 per cent, respectively.

"There is a downward trend in the lower end of the yield curve with rates headed south," says Charles Ocholla, Head of Investment Banking, at Sterling investment Bank.

unlocking liquidity

"Most people are betting along the upper end of the yield curve," he says.

Ocholla says the shift is likely to persist for a while, as long as the interest rates regime tilt towards the upper end of the yield curve.

"The shift will depend on interest rates and investor appetite," he says. Central Bank reduced the cash ratio and its key lending rate (CBR) for commercial banks from a high of six per cent and nine per cent to five per cent, and 8.25 per cent respectively in less than five months, with a view of unlocking liquidity in the banking system and drive down interest rates.

"Basically, most banks don’t hold these instruments to maturity. They are just holding them to trade in the secondary market," he adds. Banks, however, say bonds can boost their liquidity.

"Long-term instruments are tradable and can also be used to shore up liquidity," says John Wanyela, Executive director, Kenya Bankers Association.