Analyst’s Opinion
The interest rate on the 10-year bond issued this month by Central Bank Of Kenya hit 16.1 per cent signaling more expensive credit even as the CBK left the CBR untouched. The 182-day and 364-day Treasury bill issues last week also saw yields climb yet again, by 0.46 and 0.58 percentage points respectively to 14.1 and 14.9 per cent.
Government appetite to pay a premium on both T-Bond and Bill is a clear signals it need to have the heavy January maturities for bonds and bills rolled over as it plugs a wide budget deficit. High rates will see companies looking to borrow pledging a higher premium as most corporate bonds are priced using government bonds.
It is clear to the market the government’s debt maturity structure is placing upside pressure on interest rates. Large maturities of government T- bills and bonds are prompting the market to place higher bids at auctions and most investors would prefer to invest in shorter duration debt in order to avoid mark-to-market losses.
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Interest rates are expected to come down later in the year due to reduced inflationary pressure and a stable currency. Bank loan borrowers will also be cautious as they observe how the commercial banks will respond, still affecting the much anticipated growth.
By not touching CBR and KBRR, CBK expects commercial banks not to press borrowers but this is unlikely due to crowding out effect.
From close analysis, money market rates can deviate from time to time without the CBR adjusting. The government ought to provide a signal to the market that they are willing to consolidate in order to taper the rise in rates
The other option for government remains external borrowing, though the viability is not always favorable in term of cost and risks
Theuri Paul
Financial & investment Analyst.
@paultheuri87
Note; The author’s article does not necessarily represent Kenyan Wall Street’s views.
