(Reuters) – Investors are expecting Kenyan Treasury bill yields to rise further in the first quarter, buoyed by a spike in inflation to 8 percent and by demand for higher returns on debt rolled over from late 2015 when rates peaked above 22 percent.
But yields are not seen climbing to last year’s highs, partly because foreign demand for Kenyan debt is still solid in the face of other, less appetizing options for dedicated Africa investors.
So far this year, yields on the 91-day bill have edged higher to above 11 percent, 182-day yields are more than 13 percent and 364-day bill offer above 14 percent. All are below the 2015 peak.
“If you invested at 20 percent, are you likely to come in and invest at 11 percent? No, you will think twice,” said one fixed income trader at a Nairobi-based commercial bank.
Fixed income traders said some 212 billion shillings ($2.07 billion) worth of bills and bonds were maturing from January to March, including short-term debt with yields around 20 percent.
Adding to pressure, inflation rose to 8.01 percent in the year to December, up from 7.32 percent a month before and above the government’s preferred 2.5 percent to 7.5 percent band.
“The recent hike in headline inflation in December was quite aggressive and is expected to continue in January due to one-off increases in education and household rent,” said Alexander Muiruri, fixed income analyst at Kestrel Capital.
“These factors coupled with only a marginal decline in oil pump prices will force investors to add a higher premium to Treasury bill rates,” he said.
But investors say the rise may only be a few percentage points and well short of the 20 percent mark this time.
“I see the rates should go to the level of 14, 15 percent and stabilize there for a while,” a fixed income trader at one Nairobi-based securities brokerage said.
LESS ATTRACTIVE
One reason for anchoring the yields is that African alternatives for foreign investors, particularly those with dedicated Africa funds, look less appetizing.
South Africa’s economy and its currency has been hammered by a slide in commodity prices, sending the rand down 7.7 percent since the start of 2016, and 35 percent over 2015. In Egypt and Nigeria, both big and usually popular markets, investors have faced capital control restrictions.
“Kenya does not have capital controls – Nigeria, Egypt – or a currency where confidence has been gravely weakened – South Africa,” said Charles Robertson, global chief economist for Renaissance Capital.
“Kenya is interesting for investors as it is a beneficiary of lower oil, and more important still, investors don’t fret about getting their money back,” said Robertson.
Anders Faergemann, senior sovereign portfolio manager at PineBridge Investment, said Kenyan debt was also attractive due to the exchange rate stability and also benefited from its free float.
Kenya’s shilling has barely moved this year after weakening by a reasonably modest 11 percent in 2015.
