[sws_blockquote_endquote align=”left” quotestyle=”style02″]The gap between overnight rates and the three-month treasury bill yields of 16.6 per cent — more or less in line with the policy rate – is problematic, as it encourages banks to place money overnight, rather than to invest in government securities,[/sws_blockquote_endquote]
Subscriptions at weekly government paper auctions have been low in the past few months also due to tight liquidity in the financial markets – brought about by the Central Bank of Kenya’s aggressive moves to curb depreciation of the shilling and tame inflation. Uptake of last week’s 91-day Treasury bill (T-bill) was at 33 percent, the latest in a string of under-subscriptions of similar papers.
[sws_blockquote_endquote align=”left” quotestyle=”style02″]We expect subscription levels to remain poor as the regulator continues to starve the market of liquidity,[/sws_blockquote_endquote]
The latest two-year bonds realized Sh10.8 billion against an offer of Sh15 billion, a development which is straining government finances. This has caused Treasury to frequently resort to the Central Bank for an overdraft, keeping it very close to the fiscal year limit of Sh25.9 billion. As at the end of last week’s 91-day T-bill auction, African Alliance estimated that the government borrowing was below target by Sh67.6 billion. Government had hoped to frontload the borrowing in the first six months of the financial year.
[sws_blockquote_endquote align=”left” quotestyle=”style02″]Given the lacklustre demand for Treasury bills in the recent primaries we estimate that currently the government’s borrowing programme is now Sh67.6 billion off target,[/sws_blockquote_endquote]
The report noted that there was a likelihood of commercial banks keeping out of the primary auctions except for the two-year bond that fetched 22.8 percent as coupon rate – the highest for any bond in the market for over eight years.
[sws_blockquote_endquote align=”left” quotestyle=”style02″]With sentiments that the Central Bank will continue in its push to support the shilling through an aggressive tightening monetary policy, less and less money is finding its way to the primary market as those with liquidity look to maximize through the money market and deposit rates,[/sws_blockquote_endquote]
The same view is shared by Ms Khan who says that the treasuries are likely to remain inactive but maturities will boost liquidity.
[sws_blockquote_endquote align=”left” quotestyle=”style02″]Although domestic bond issuance will be muted near-term, and T-bill maturities in mid-December should help boost market liquidity, how the authorities finance Kenya’s budget deficit will have to be closely watched.[/sws_blockquote_endquote]
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