Investors scrambled to purchase Treasury bills and lock in attractive returns as interest rates continued to retreat following the recent rate cut by the Central Bank of Kenya (CBK).
The CBK received bids of Sh80.93 billion from investors in a week when rates on the 182-day and 364-day Treasury bills fell to levels last seen in December 2023, and the 91-day rate to its September 2023 levels.
The CBK helped the rates down by rejecting the bulk of the bids that it deemed to be expensively priced, taking up Sh34.56 billion. As a result, the 91-day rate fell to 14.76 percent from 14.99 percent the previous week.
On the 182-day paper, the rate fell to 15.63 percent from 16.09 percent the previous auction, while that of the 364-day declined to 15.91 percent from 16.33 percent previously.
The CBK normally offers Sh24 billion worth of T-bills to the market every week, split into tranches of Sh10 billion each for the six-month and one-year papers and Sh4 billion for the three-month paper.
The heavy oversubscription is attributed to a rush by investors to lock in returns at present rates before they tumble further in coming weeks.
The previous week’s auction followed a similar pattern, where investors put up offers of Sh73 billion, but only Sh31.2 billion was taken up by the CBK.
T-bill rates have now come down for 12 straight weeks since the beginning of August, with the pace of retreat accelerating after the CBK’s monetary policy committee cut its base rate by 0.75 percentage points to 12 percent in its October 6 meeting.
The MPC first cut its rate by 0.25 percentage points to 12.75 percent on August 6—the first cut since April 2020— backing its desire to see domestic interest rates come down after the recent fall in inflation and the stabilisation of the exchange rate market.
CBK’s push to lower the cost of funds in the market is meant to cure the problem of rising loan defaults, while also stimulating growth in lending to the private sector which will increase consumer spending and business investments, both key ingredients in economic growth.
By the end of August, the ratio of non-performing loans to total loans in the banking sector stood at 16.8 percent, while annualised private sector credit growth had slowed to a seven-year low of 1.3 percent.
Further downward pressure on domestic interest rates is expected once the government closes a $1.5 billion (Sh193.9 billion) bond that is backed by the United Arab Emirates in coming weeks.
The external financing will allow the Treasury to revise its domestic borrowing target for the current fiscal year downwards by Sh24.7 billion to Sh388.37 billion.
The government had planned to borrow Sh168 billion from external commercial lenders in the year, but will now hole to exceed that by the margin of Sh24.7 billion and translate the surplus into a cut on its domestic borrowing.
