Investors are likely to shun auctions, with demand primarily remaining volatile for the remainder of 2022.
According to Analysts from NCBA Research, this is reflective of liquidity conditions in the market.
“Certainly, less pronounced government inflows in lieu of payments has greatly distorted interbank cash conditions,” they note in their NCBA Weekly Fixed Income Report – 24th October 2022.
“As a result, the overnight rate has largely remained sticky above 5.00% this October. Meanwhile, the central bank has maintained its support of cash-strapped players via weekly reverse repos.”
Demand primarily focuses on short-dated securities against expectations of higher interest rates they observe.
“These strategies are contrary to the sovereign’s partiality to lengthen the maturity profile of public debt.”
“Having only met about 16% of its domestic debt target for the FY2022/23 at a time when external credit markets have tightened, and local revenues are underperforming, the sovereign is expected to raise its appetite for local deficit financing.”
Fixed Income
In the week, the Central Bank of Kenya released results for the newly issued bond, FXD1/2022/025, with effective tenors to maturity of 25 years.
The government issued the bond seeking to raise Kshs 20.0 billion for budgetary support, received bids worth Kshs 14.9 billion and accepted bids worth Kshs 13.7 billion, translating to a 91.7% acceptance rate.
The coupon rate and weighted average yield for the bond came in at 14.2%. The bond recorded an undersubscription of 74.5%, partly attributable to investors’ preference for the shorter-dated papers as they sought to avoid duration risk.
Treasury Bills
In contrast, T-bills remained oversubscribed, with the overall subscription rate coming in at 117.9%, a slight increase from the 116.7% recorded the previous week.
Investor’s preference for the shorter 91-day paper persisted, with the paper receiving bids worth Kshs 19.5 billion against the offered Kshs 4.0 bn, translating to a subscription rate of 488.0%, up from 253.8% recorded the previous week.
The subscription rate for the 364-day paper slightly increased to 39.7% from 39.2% recorded the previous week, while the subscription rate for the 182-day paper declined to 48.2% from 139.5% recorded the previous week.
Subsequently, liquidity in the money markets tightened, with the average interbank rate increasing to 5.1% from 5.0% recorded the previous week, partly attributable to tax remittances that offset government payments.
In the coming week, NCBA says settling T-bills, T-bonds and reverse repos should constrict the market liquidity distribution.
“However, this will likely be offset by end-month payments and central bank support to cash-strapped players.”
