Banks’ rising appetite for risk-free securities hands Treasury cheaper credit

Sunday September 18 2016

Regional economist East Africa at CfC Stanbic Bank Jibran Qureishi. PHOTO | SALATON NJAU

Banks have continued bombarding the Treasury bill auction with multibillion offers forcing down the price at which the National Treasury is borrowing.

The 91-day Treasury bill (T-bill) which is currently trading below its five-year average of 10.4 per cent was trading at 8.087 per cent while the 182 day T- bill sold at 10.812 last week.

Analysts say market-driven sentiments as banks shy away from lending to the more risky private sector is handing the Treasury cheap credit.

“It was entirely predictable and predicted that banks would rush to the safety of ‘risk-free’ assets. The flight to quality has been a major part of the narrative for quite a while now. The rate cap Act has further accelerated this trend,” CEO of investment advisory firm Rich Management Ltd Aly-Khan Satchu said.

Treasury bills subscriptions increased during the month of August, with overall subscriptions coming in at 144.1 per cent compared to 95.5 per cent in July before the rate cap legislation was signed into law.

Yields on 182-day and 364-day T-bills were then on the rise closing the month at 11.1 per cent and 11.5 per cent, from 10.5 per cent and 11.4 per cent respectively at the end of July.


The increase in yields during the month was on account of government borrowing given the new fiscal year.

“However, at the tail end of the month, yields declined by 35 bps, 6 bps and 48 bps for the 91-day, 182-day and 364-day papers following the enactment of The Banking Act (Amendment) Bill, 2015, which is likely to lead to more demand for government securities in the medium term,” Cytonn Investments said in its weekly bulletin.

Regional economist East Africa at CfC Stanbic Bank Jibran Qureishi, said although treasury bills are trending downwards they may not cross the seven per cent mark given the cap on deposit rates.

“They will not fall below 7.35 per cent in the short end of the curve because if the cost of funding is the seven per cent no one will bid below that,” he said.

Mr Qureishi said the current scenario is only driven by market knee-jerk reaction to the interest rates law and is likely to dissipate in the coming two to three months when the fundamentals kick in.

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“The sentiment will go down and the market will be looking at the government — if it will be able to secure external funding for the budget, the timing of this funding and the expansionary fiscal policy, on which I believe this budget is very big,” he said.

Deepak Dave of Riverside Capital said in the short term the law will push down development costs. The problem will arise if the Treasury fails to keep fiscal deficit under control in an election year. With a higher debt and deficit servicing costs will jump.

Analysts agree that the falling rates will impact on bonds as banks struggle to lock in high rates. The Central Bank of Kenya recently offered five-year and 20-year Treasury Bonds for a total amount of Sh30 billion at 14.069 per cent and 14.836 per cent.

“Yes I think we will also see Investors lengthening duration [particularly where yields are above the Cap],” Mr Satchu said.