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The average time to maturity for government bonds dropped further to 7.3 years as of July 2024 on the low uptake of long-dated securities amid high interest rates.
The shortening of the average time to maturity points to a higher liquidity risk for the government as the term of outstanding bonds shortens as it is forced to meet redemptions on most papers within a shorter period.
Bonds’ average time to maturity stood at 8.2 years at the end of December last year and 8.6 years in June last year according to data from the Central Bank of Kenya (CBK) but has contracted thereafter reflecting low investor interest in the term papers amid a high interest environment.
“This is indicative of low appetite for long-dated instruments that are highly impacted negatively by rising interest rates,” CBK says.
The CBK further notes that long-dated bonds often carry high coupon rates to attract investors and deal with concerns of high-duration risks.
The apex bank has shunned issuing long-dated bonds in the high-interest rate environment with the view of avoiding higher payouts to investors for a prolonged period.
Despite the drop in bonds’ time to maturity, the CBK says the refinancing risks for domestic debt remain low but have increased.
“The relatively high level of ATM indicates low refinancing risks of domestic debt, which contributes to overall financial stability,” CBK added.
Yields on bonds increased from an average of 12.46 percent in 2022 to an average of 13.53 percent in 2023 before rising further to 16.28 percent in the first half of 2024.
Banks, pension funds, and insurance companies have favoured investing in bonds due to an increase in the return on offer alongside an elevated credit risk in lending, signalled by a higher non-performing loan ratio.
Despite the rising interest rates and the shunning of long-dated bonds, the government was still able to meet its domestic borrowing target last year, according to the CBK.
The exchequer has at the same time relied on Treasury bonds for the bulk of its domestic credit needs with the ratio of discount securities to bonds remaining relatively unchanged at a 12 and 88 percent split from an 11 to 89 percent split at the end of last year.
The relatively unchanged ratios are seen as an important outcome of the medium-term debt strategy in addressing refinancing risks.
The CBK has limited itself to shorter-term bond issuances and re-openings as it attempts to nudge down interest rates on government securities.
The pressure to suppress interest rates on bonds has been mirrored by the decline in the ratio of average accepted bids to offer amount.
Short-term interest rates have also soared with yields on Treasury bills/discount securities increasing from a mean 9.04 percent to 12.55 percent in December 2023 and further to 16.52 percent in June.
The yield curve remains inverted with shorter-dated papers carrying a higher return to long-dated issuances despite the latter having greater duration risks.
The yield curve is traditionally upward-sloping where instruments with the longest time to maturity offer the highest returns.
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