Kenyan bond market review
The share of the government’s domestic debt held in the form of Treasury Bills has fallen to a new low of 11.8 per cent from 15.01 per cent in January, signalling increased repayment of the short-term securities amid efforts to lengthen the maturity profile of public debt. CNBC Africa spoke to Stellah Swakei, Senior Associate, Research at Standard Investment Bank.
Wed, 13 Sep 2023 10:58:53 GMT
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- The decline in the share of Treasury Bills in domestic debt points to a shift towards repaying short-term securities and elongating the maturity profile of public debt, driven by investors favoring high-yield government securities with short tenors and competitive rates.
- The surge in interest rates for shorter-tenor bonds, exceeding 15 per cent, has attracted investors, leading to a decrease in outstanding T-bill stocks and a concentration of investment in the 91-day paper, overshadowing the 182 and 364-day bills.
- President William Ruto's call to lower entry barriers for Treasury Bill and bond trading, coupled with the launch of the DOW CSB platform, aims to broaden investor participation, enhance local funding sources, and support infrastructure development and budget financing in Kenya.
Kenya's government debt landscape is experiencing a shift as the share of Treasury Bills in domestic debt has plummeted to a new low of 11.8 per cent from 15.01 per cent in January. This decline signals a trend towards increased repayment of short-term securities and a push to extend the maturity profile of public debt. CNBC Africa recently spoke with Stellah Swakei, Senior Associate, Research at Standard Investment Bank, to delve into the dynamics driving these changes in the Kenyan bond market.
The government offers three types of Treasury Bills - the 91-day, 182-day, and 364-day papers, with significant attention historically focused on the 91-day paper, which has been favored by investors for the past year. The competitive interest rate offered by the 91-day paper, standing at 14 per cent currently, has steered investors away from the 182 and 364-day papers. This attraction to the 91-day paper, with its higher rate and shorter tenor, has shifted investor preferences.
In addition to Treasury Bills, investors are showing a preference for shorter-tenor bonds. The government has responded by issuing bonds with shorter tenors, reflecting the market demand for high-yield securities with rates above 15.5 per cent. Bonds with a two-year tenor, offering nearly 15 per cent, are gaining traction in the current high-interest rate environment, presenting investors with attractive opportunities in government securities.
The shrinking outstanding stocks of T-bills in Kenya, as reported by the Central Bank, indicate a decline from 671 billion Kenyan shillings at the beginning of the year to 567.7 billion as of September. This reduction can be attributed to the allure of high returns offered by bonds, particularly those with shorter tenors and interest rates above 15 per cent, appealing to investors seeking lucrative options. The relative unattractiveness of the 182 and 364-day Treasury Bills, with subscription rates as low as two or three per cent, has bolstered the dominance of the 91-day paper in the market, leading to a decrease in the proportion of Treasury Bills in domestic debt.
President William Ruto recently advocated for the Central Bank of Kenya to lower the entry level for trading in Treasury Bills and bonds, aiming to broaden the pool of retail investors and promote the Hassler Fund initiative. This policy change, alongside the introduction of the new DOW CSB platform for online securities trading, is expected to enhance investor participation in government securities. By reducing the initial investment thresholds for short-term papers, the government seeks to attract more local investors, thereby reducing reliance on external borrowing for funding. The widened access to bond and Treasury Bill trading is projected to benefit infrastructure development, budget financing, and overall economic growth by increasing local funding sources and alleviating pressures on taxation.
Stellah Swakei views this policy shift as a pivotal strategy for bolstering government funding from local investors, promoting financial inclusion, and empowering citizens to participate actively in shaping the country's economic landscape, particularly in underserved regions. The move towards facilitating easier access to securities trading aligns with the broader goal of diversifying funding sources while fostering a supportive environment for investor engagement in Kenya's bond market.