The Central Bank of Kenya (CBK) has issued an extended offer of Ksh.9.7 billion to its December Ksh.25 billion bond sale whose auction took place on December 13.
Having accepted bids worth Ksh.18.7 billion from oversubscribed investor offers totaling to Ksh.28.5 billion, and after rejecting expensive bids, the reserve bank is now seeking to raise the balance by taking advantage of the prevailing bond market conditions.
The targeted tap sale is open to December 19 and will see investors collect a fixed return of 11.49 percent on accepted bids.
The sale, which makes for CBK’s third extended offer in the 2019 calendar year follows the bank’s change in tact which has seen the offer of short maturing bonds to take advantage of uncertainties in interest rates following the repeal of caps at the start of November.
This is as investors shun long tenured bonds to opt for shorter-termed issues in anticipation for a rise in the return made from government borrowing.
December’s issue was for instance tenured at five years and went for a lesser target to the customary range of Ksh 40 to Ksh.60 billion in previous monthly offers to government debt investors.
As such, the short-term issues and the subsequent offer of a tap sale are expected to become the new norm as the yield curve evolves to a new benchmark.
“Investor believe the interest rates are bound to go up and are therefore not willing to commit their capital for a long time,” Sterling Capital Head of Research Renaldo D’Souza told Citizen Digital.
The disapproval of long-tenured bonds is evidenced by the plunge in the November’s subscription which tumbled to 76.8 percent in the aftermath of the rate cap repeal from an over-subscription of 144.9 percent in October.
The new attraction to the short end paper has therefore resulted in comfort on CBK’s part to see it reject bids by over-aggressive investors.
Nevertheless, the yield curve is expected to shift north as the reserve bank loses its bargaining chip from the rate cap repeal which has seen lenders regain options to put their surplus funds elsewhere.
The average yields on Treasury bills (T-Bills) has already picked up with the return on 91-day and 182-day papers having risen by 0.3 and 0.4 percent respectively in November.
Genghis Capital Equities Analyst Gerald Muriuki therefore reckons the CBK must seek to strike a balance in its acceptance of bonds pressed on one side by the sustained appetite for domestic borrowing by the government.
“The CBK would still seek to manage the return paid out to investors in one way or the other. Fixing the rate would however be difficult given the appetite represented in government borrowing,” he said.
CBK will however find short term leverage and comfort from the absence of bond redemption in the first quarter of 2020 which allows for pro-activeness in the issuance of bonds for budgetary support.
Presently, the CBK has only mopped up 39.3 percent of the originally estimated issue of Ksh.429.4 billion in domestic bonds by the close of June 2020 as of October 31.
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