Investors bid Sh487.5 million on the tap sale of a re-opened two-year paper this week against a target of Sh20 billion by the Central Bank of Kenya (CBK).

They are pricing in the likelihood of interest rates on bonds rising further in coming months in anticipation that the government will be under pressure to raise its local borrowing target from the approved Sh263 billion after withdrawal of the Finance Bill, 2024.

A higher domestic borrowing target will give investors the leeway to aggressively bid on bonds securing greater returns in contrast to current interest rates of about 16 per cent on long-term paper. While the latest bond auction was spurned, Treasury bills were oversubscribed at Sh29.8 billion against a target of Sh24 billion. Those on short-term securities recovered from a low of Sh7.6 billion in the previous sale.

Standard Investment Bank (SIB) Research Analyst Wesley Manambo says investors are finding comfort in Treasury bills as they await clarity on the revised 2024/25 fiscal deficit and the domestic borrowing target.

Investors

“The executive has been speaking on both sides of the mouth and investors are left at a point where they have to wait and see. The investors are betting on better rates at a future date and the best place to be now is in Treasury bills, cash and near cash instruments,” he said.

Bids on Treasury bills remain biased on the shortest paper timed at 91 days, with the latest auction seeing investor interest at Sh14.8 billion against a target of Sh4 billion.

Investor bids on the longer 182 and 364 days papers were lower at Sh9.4 billion and Sh5.6 billion respectively against a target of Sh10 billion on either security.

The returns on Treasury bills have continued to rise through recent weeks despite a suggested peak in interest rates, signaling the persistent demand for the instruments by investors.

President William Ruto threw a curve ball to investors last month when he suggested that the fiscal deficit could rise to up to Sh1 trillion for the financial year that started July 1 just days after the National Treasury proposed to cut spending by Sh346 billion to adhere to the approved budget hole of just Sh597 billion.

“We have dropped the Finance Bill. What does that mean? It means we have gone back almost two years. It means that this year, we are going to borrow Sh1 trillion to be able to run the government,” said President Ruto.

Investors have tended to hold back on purchasing long-dated bonds during uncertainties, favouring short-dated government securities in anticipation that higher borrowing targets would push up interest rates.

Investors snub on bonds could see the CBK struggle to draw adequate interest on sale of the re-opened 10-year and 20-year bonds seeking to raise Sh30 billion and which runs to July 17. CBK closed its 2023/24 local borrowing program as it raised Sh84.8 billion in June against a target of Sh80 billion.