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Investors face a race to lock in higher interest returns in the October Treasury bond sale which closes today, with rates expected to come down in subsequent offers after the Central Bank of Kenya (CBK) further cut its indicative lending rate by 75 basis points to 12 percent on Tuesday.
The bond offer—comprising two reopened 10-year papers first sold in 2016 and 2022— is seeking Sh30 billion and has been on sale since September 25.
The 2016 paper, which has 1.8 years to maturity, carries a coupon (fixed interest rate) of 15.04 percent, while the coupon on the 2022 paper, which has 7.6 years left to redemption, has a coupon of 13.49 percent.
Analysts however expect bidders to ask for relatively higher returns on the bonds, in line with recent auction trends, partly to lock in attractive returns before rates come down.
This, the analysts said, should see the sale yield high bid volumes, especially on the shorter duration paper, but the CBK is likely to reject those priced highly to help pull down domestic interest rates.
“We expect a push-pull dynamic between the CBK’s yield moderation efforts and investors’ demand for high returns as they seek to optimise real yields in the current environment,” analysts at AIB AXYS Africa said in a note on the bond.
According to Genghis Capital, the sale will likely yield aggressive bidding and medium to high participation rates, although rejection rates will likely be high going by recent CBK actions in the market.
For the 2016 bond, Genghis sees optimum investors asking yields of between 16.75 and 16.95 percent, AIB AXYS Africa recommended bid levels between 16.9 and 17.5 percent, while Sterling Capital went from 16.69 to 16.84 percent.
In the 2022 paper, Genghis pointed to bid levels of 17.1 to 17.25 percent, Sterling at 16.79 to 16.94 percent, and AIB AXYS Africa at 16.79 to 17.29 percent.
The race to lock in high rates was seen in last week’s Treasury bills sale, where investors offered the government Sh54 billion against a target of Sh24 billion, but the CBK ended up rejecting Sh25 billion on account of high-rate demands.
This is despite the government needing to borrow Sh413 billion from the domestic market in the current fiscal year.
“While the larger fiscal deficit suggests a rise in interest rates, CBR cuts point to the opposite. We lean towards the latter as having a bigger impact on investor decisions given recent trends in T-Bill rates,” said Sterling Capital in a note on the bond sale.
Treasury bill rates have declined for eight consecutive weeks, largely due to the CBK rejecting offers it deems to be expensive.
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