Party is over for speculators as CBK reins in yields on State bonds

The era of high interest rates on Government securities is over as the Central Bank moves to limit the cost of the national debt.

Central Bank of Kenya (CBK) Governor Patrick Njoroge said the State banker will only accept bids within the yield curve and would turn down high bids by investors seeking to capitalise on the Government’s high appetite for funds.

Last week, CBK rejected high bids placed on a Sh30 billion bond, opting instead to cancel the borrowing to help plug the budget shortfall.

The regulator was expected to carry out the auction for the reopened 15-year bond on Wednesday, but cancelled it in a notice published on Thursday.

CASH CRISIS

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“When they put in bids, they were not large and some of the prices were way outside the yield curve. There is a feeling that the Government has insatiable need to borrow and that is why some of them are bidding on crazy rates,” said Dr Njoroge at a press briefing in his office yesterday.

This was the second time an auction of a Government security has been cancelled. The State called off the auction of the 364-day Treasury-bill (T-bill) on December 28, last year.

He said his team has worked hard for one and a half years to stabilise the rate that is reflective of market trends. Kenya was hit by a price shock around September 2015 when the market sensed that the Government was undergoing a cash crisis, attracting high bids that saw the National Treasury borrow at rates of over 20 per cent. During the price hike, Nairobi Securities Exchange (NSE)-listed banks raked in Sh47.2 billion from selling Government securities in nine months.

Financial statements for the 11 listed banks show that income earned from selling Government paper for the period ended September 30, 2016 was higher than that earned in a similar period last year by 52 per cent. This is hugely attributed to the high returns on Treasury bonds and bills last year.