The Treasury has returned to the money market for a tap sale of this month’s two-year bond, seeking an additional Sh20 billion from the issue even as it refuses to pay investors a higher price.
In the initial sale of the Sh30 billion bond the government took up only Sh10.5 billion out of offers worth Sh35.5 billion, indicating an unwillingness to take up expensive debt at a time investors such as banks are lining up to lend to the State.
The tap sale will be open until December 29 and is targeted at mopping up the money left on the table during the initial sale as well as bond maturities worth Sh29 billion due this week.
Central Bank of Kenya said in the bond prospectus that the tap bids shall be priced at the weighted average rate of the accepted bids for the primary auction held on December 14 (12.51 per cent) and adjusted for accrued interest.
This means that the government will effectively be locking in a lower rate for the bond should the tap sale be successful, given that the average rate for the rejected offers in the primary sale stood at 13.07 per cent.
“They are keen to get reasonably priced debt considering the players don’t have many options to look out for, bearing in mind bonds seem the only logical source of return for most banks and investment funds,” said NIC Securities fixed-income dealer Stanslaus Kimani.
The Treasury still has the option of looking to external markets for debt should it feel that it can get cheaper credit there.
The government is also ahead of target in its domestic borrowing programme, which means that it is unlikely to accept bids deemed more expensive than the prevailing yield-curve level.
Analysis done by Cytonn Investments shows that the State has taken up Sh155 billion in new debt, against a pro-rated target of Sh141.6 billion since the beginning of the fiscal year.
This is as per the revised fiscal year domestic borrowing target of Sh294.6 billion (from Sh229.6 billion previously).
The fact that competing investment classes have not performed well this year limits options for investors with equities down about 23 per cent in the year-to-date.
Banks are also facing lower interest margins on customer loans due to the rate-cap law introduced in September, thus informing their shift to government securities.
The secondary market is also slowing down as the year ends — a period when most investors prefer to avoid holding a cash position.
“The market supply has greatly reduced; an indication that investors are not willing to risk crossing over the year with cash hence preferring to hold their current positions,” said Genghis capital in market brief.