Cash-rich investors rush to park Sh105b in State bonds

Central Bank of Kenya (CBK) holds and manages foreign exchange reserves, is charged with the responsibility of formulating monetary policy to achieve and maintain price stability Feb 6, 2020. [Jonah Onyango, Standard]

Investors have flocked to secure their wealth in government paper, with the latest Treasury bond that Central Bank of Kenya (CBK) re-opened being oversubscribed by 262 per cent.

Five and 10-year Treasury bonds that CBK offered got total bids of Sh105 billion against the government’s offer of Sh40 billion as liquid investors sought the safe haven of government debt.

The five-year bond with a maturity date of December 9, 2024, received bids worth Sh60.9 billion while the 10-year bond attracted total bids of Sh44.2 billion.

Close to half of the bids, Sh49 billion, were accepted with the government expected to pay an interest of 11.49 per cent for the five-year T-bond and 12.28 for the 10-year bond that will mature in November 12, 2029.

CBK data shows investors, particularly banks, have been swimming in cash most of it from the settlement of pending bills by State corporations, VAT refunds and interest payments on domestic debt. 

Sixty per cent of the total bids received, Sh30.9 billion, were redemptions while the rest were new borrowings.  

As of June 5, Treasury bonds - long term debt - had reached Sh2.2 trillion as the government converted most of the short term debts, Treasury bills, by issuing more bonds.

This was an increase of 23 per cent from Sh1.74 trillion worth of Treasury bonds that the government owed investors.

However, the share of Treasury bills has since declined by seven per cent to Sh885 billion during this period.

Risky borrowers

This comes at a time when banks, spooked by the adverse effects of Covid-19 pandemic, have been setting aside billions of their earnings as insurance against a surge in bad loans even as they cut lending to risky borrowers, particularly individuals and small businesses.

A reduction in CBK’s benchmark lending rate to seven per cent, the lowest in nine years, has also contributed to the increased flow of credit to the private sector, which grew by nine per cent in April.

Cash Reserve Ratio - the fraction of customer deposits banks are required to leave with CBK - was also cut by one percentage point, freeing up Sh35.2 billion which banks were required to lend to businesses distressed by the pandemic.   

The rate at which banks lend to each other overnight has also gone down, touching a 10-month low of 2.3 per cent on June 12 before it went up to three per cent on Wednesday.

Issuance of long-term Treasury bonds is critical for Treasury’s plan of lengthening the maturity of its domestic debts. 

Debt repayment

According to Moody’s, a global rating agency, Kenya has a challenge in spacing of repayment of external debt as well as the need to roll over a large stock of domestic debt.

“Treasury bills accounted for 31 per cent of domestic debt as of December 2019, up from 25 per cent at the end of 2014,” said Moody’s in a report.

The share of Treasury bills in the debt has since dropped to 28.7 per cent as at June 5 from 35 per cent on June 28 last year.

Whereas the five and 10-year Treasury bonds might be among the last offering by the government for the current financial year ending June, there are fears that this trend might continue well into the next fiscal calendar, thus crowding out the private sector, which has been ravaged by the Covid-19 pandemic.