Throughout the year, investors have shown a preference for the short-end. Treasury has only managed to attract uptake of long-term securities by offering higher and higher rates, such as the Ksh.213.4 billion tax-exempt infrastructure bond whose effective interest rate was 22.65 percent issued on June 19, 2023.
In last week’s auction for securities dated August 21, only the 91-day bill was oversubscribed.
The 955.7% performance shows that the market prefers the shortest-term securities. The 182-day and 364-day bills attracted very low subscription rates at 39 and 26 percent respectively.
Further, the market demanded very high-interest rates for longer maturities – 17.55% for the 2-year and 18.16% for the 5-year, both of which were on tap. The subscription rates for the two re-opened bonds were 96 and 37 percent respectively.
Three forces are driving this market sentiment. First, the Central Bank’s stated intention to keep interest rates high until inflation is contained. Second, the Treasury’s aggressive domestic borrowing program, requiring Ksh.46 billion monthly in new debt.
And third, skepticism on the ability of a sluggish economy to generate the 2.9 trillion targeted tax revenue this year. Failure to meet revenue targets will mean higher borrowing.
Treasury has responded by announcing a change of strategy, shifting 270 billion intended to be borrowed in the domestic, to now external borrowing.
The market has remained skeptical, however, because interest rates are high internationally and the country’s credit rating was downgraded last December.
As a result of these trends, businesses are likely to face very high financing costs well into 2025.