High Market Liquidity Helps Kenya Treasury to Access Cheaper Deficit Financing

High Market Liquidity Helps Kenya Treasury to Access Cheaper Deficit Financing

Central Bank of Kenya building

Investors oversubscribed five-year and a 10 year Treasury Bond ( FXD3/2019/5 & FXD4/2019/10 )  that the Central Bank of Kenya (CBK) receiving bids worth KSh105 billion against KSh40 billion target.

“The reopened 5-year and 10-year Treasury bonds offered at the auction of June 17 received bids totalling KSh 105.1 billion against an advertised amount of KSh 40.0 billion, representing a performance of 262.8 percent. The interest rates for the Treasury bonds decreased compared to previous issues of similar instrument,” CBK weekly bulletin for the week ending Friday 19 June revealed.

The performance is attributed to high liquidity in the market.

This is due to payment of pending bills and VAT refunds, tax relief measures, and reduction in commercial bank reserve rate (CRR) which has injected immense liquidity.

“This has scaled up demand for government papers, exerting downward pressure on yields,” says NCBA Research.

The five-year bond with a maturity date of December 9, 2024, received bids worth KSh60.9 billion while the 10-year bond attracted bids of KSh44.2 billion.

However, the CBK accepted KSh49 billion with the government expected to pay an interest of 11.49 percent for the five-year T-bond and 12.28 for the 10-year bond that will mature in November 12, 2029.

“The preference towards the shorter tenor paper can be attributed to investors avoiding the duration risk associated with longer-dated papers,” Cytonn Investments noted. 

Yields on the bonds came in at 11.5 percent and 12.5 percent, for the five and ten-year bonds respectively

The CBK reduced its benchmark lending rate to seven percent, the lowest in nine years contributing to an increased flow of credit to the private sector, which grew by nine percent in April.

“This has sufficiently offset the effects of loan restructurings on balance sheets, keeping banks well funded,” says NCBA Research.

“Liquidity conditions may improve further in the near term with the typical end year payment by the government. This may however be partly offset by the end of quarter tax payments. However, we expect that this will not be strong enough to significantly alter the liquidity landscape, in part because of the reduction in corporation income tax. That said, towards end of the month, the typical flow of unutilized funds back to Treasury may drain some funds from the market,” they add.

Treasury Bills

Renaldo D’Souza, Head of Research at Sterling Capital Limited, on the other hand, notes that “High market liquidity and risk aversion by banks has seen one of the highest subscription rates and the biggest drop in T-Bill rates in years.”

This is because, during the week,  Treasury bill auction of June 18 received bids worth Ksh45.2 billion against an advertised amount of Ksh24 billion representing a performance of 188.4 percent.  The CBK accepted Ksh14.72 billion of the bids.

91-day, 182-day, and 364-day papers received bids amounting to Ksh13.374 billion, Ksh13.057 billion, and Ksh18.775 billion respectively. The CBK accepted Ksh6.357 billion, Ksh4.238 billion and Ksh4.125 billion of the same respectively.

According to D’Souza, “The Monetary Policy Committee (MPC) meets on 25th June and if private sector credit remains a focus, this should be a key concern for the monetary policymakers. High market liquidity as expected under the current economic conditions has worked in favour of the Government which has been able to access cheaper deficit financing.”

The last three auctions have seen a significant drop in T-bill rates. Since May, yields have declined to 7.089% (Down 15.30bps), 7.739% (Down 39.50bps) and 8.667% (Down 49.40bps) on the 91, 182 and 364 day papers respectively. The overnight rate has dropped to just about 3.00%.

“It remains to be seen whether the government will shift to the longer end of the curve as it seeks to lengthen average maturity for local debt. Should liquidity levels remain high, then the market may see increased duration play, favoring plans to lengthen the tenor. This may see more tenor swaps, reducing its near term debt servicing pressure,” NCBA Research in its NCBA Monthly Economic Report – June 2020.