Treasury bonds draw billions as banks shun private sector

The government’s long-term debt papers that were auctioned last week were oversubscribed by 302.9 per cent, with Central Bank of Kenya (CBK) receiving bids of Sh181.8 billion. 

This was against an offer of Sh60 billion that CBK, the National Treasury’s fiscal agent, had announced for the five, 10 and 15-year Treasury bonds.

Oversubscription of Treasury bonds and bills - short-term government debt - comes at a time when highly liquid individuals and businesses have stashed their money into fixed deposit accounts.

Rather than lending this money to the private sector and households, banks have opted to funnel it to government securities, increasingly at very low-interest rates.

For the three bonds auctioned, CBK will pay an interest of 11.66, 12.5 and 12.85 per cent for the five, 10 and 15-year tenors, respectively.

This is the first auction of T-bonds for the current financial year, with the government targeting to borrow Sh494 billion from the domestic market.

In the latest auction, CBK accepted bids valued at Sh80.8 billion with all of it new borrowing, which is expected to be used for budgetary support.

Desperate investors have been lending to the government at the cheapest rate in years, lessening the debt load for the National Treasury.

Investors pumped most of their cash into government securities, a situation that saw the inter-bank rate - the interest at which banks lend to each other - rise to 1.68 per cent, the highest since April 8, 2019, when lenders paid an average of 1.67 per cent.

Official data shows that public debt rose to Sh6.65 trillion in May, with Treasury expected to borrow an additional Sh774 billion to finance the budget amid shrinking revenues due to the Covid-19 pandemic.

National Treasury Cabinet Secretary Ukur Yatani has insisted there is nothing to worry about even as the International Monetary Fund (IMF) reviewed the country’s risk-to-debt distress from moderate to high, citing vulnerabilities occasioned by Covid-19.

“Our debt limit has been quite sustainable. We have never defaulted on any payment that has fallen due,” Yatani said in an earlier interview with The Standard.

The CS also came into office last year with a plan to exit expensive debt. “We want to be more pro-active by making sure that we retire all the commercial loans,” he said in a statement.

Commercial loans, he noted, have an interest of between eight and nine per cent. They also have shorter grace and maturity periods.

As a result, Yatani embarked on a belt-tightening mission that saw the budgets for travelling, advertisement and hospitality slashed. Unfortunately, the virus scuttled his plans, with the country’s appetite for debt inflamed by the pandemic.

Adjusting for debt repayment and improved revenue collection, Treasury is expected to breach the Sh9 trillion borrowing limit in 2023, with the country’s debt increasing by Sh2.94 trillion, according to official projections.

Another Sh367.6 billion was added into the share of domestic debt as at May.

This does not include a net borrowing of Sh26 billion that had been incurred from the domestic market by the end of the 2019-20 financial year.