Interest rates on treasury bills have declined for 10 consecutive weeks, falling to levels last seen in 2023 following the 100 basis points interest rate cuts delivered by the Central Bank of Kenya (CBK).
- •The demand for treasury bills surged, recording the steepest oversubscription rate in 4 years with investors rushing to lock in higher returns as CBK continued the easing cycle.
- •In this week’s auction, the CBK received bids worth KSh80.93 billion against the KSh24 billion on offer – a 337.2% oversubscription.
- •The CBK accepted KSh34.56 billion – 42.7% acceptance rate – with the apex bank rejecting expensive bids aiming at lowering borrowing costs. Notably, CBK accepted 44% more of what was offered pointing to the high redemptions experienced in the auction.
Demand remained skewed to the shorter term 91-day paper as investors continue to assess possible duration risks. However, with the downward trend on the yields, the dynamics might change towards longer dated papers.
The 91-day paper attracted bids worth KSh17.4 billion against the KSh4 billion on offer. The 182-day and 364-day papers received bids worth KSh34.2 billion and KSh29.4 billion respectively against the KSh10 billion on offer in the tenors.
Yields on all the tenors declined, extending the downward trend that set in after the CBK began the easing cycle in August. Yields on treasury bills typically decline ahead of expected interest rate cuts and drop further after rate cuts.
The accepted average yields fell below the 15.95% mark coming in at 14.77% for the 91-day paper, 15.64% on the 182-day paper and 15.91% on the 364-day paper. Compared to the last week of July, just a week before the first rate cut, the 91-day, 182-day and 364-day papers saw 7.7%, 7.2% and 6.0% declines respectively.
Yields on the longer dated 364-day paper fell slower than yields on the 91-day paper mirroring a yield curve normalization in the medium term.
Even with the reduced Central Bank Rate (CBR), the high fiscal needs by the government is likely to slow down efforts by CBK to push rates lower in an attempt to lessen borrowing costs.
The CBK has cut rates by a total of 100 basis points in the last two monetary policy meetings on the back of easing inflation and a slowdown in economic activity. Inflation is well contained closer to the lower bound target, with September numbers slowing down to 3.6% according to KNBS.
The apex bank began the easing cycle in August after a series of hikes from the hindquarter of 2023 spilling over to the early months of 2024 in a bid to stabilize the weakening shilling and contain the stinging inflation.
