State moves to reduce its debt burden
The government is reducing its short-term debt profile by issuing more medium-term papers to cut down pressure on its finances caused by rising maturities of the financial instruments.
At the same time, high demand for Treasury bills is a putting a downward pressure on returns as the economic uncertainty pushes investors to short-dated bonds.
Central Bank of Kenya (CBK) data shows that maturities in the short-end of the yield curve (short-term debt) are rising.
This is because of oversubscription of Treasury bills as more investors move to the short end of the curve.
“The Treasury bills auction of January 14 received bids totalling Sh26.4 billion against an advertised amount of Sh24 billion, representing a performance of 110.1 per cent,” CBK said in its weekly bulletin.
Uncertainty created by Covid-19 and shaky debt management has driven investors to short-term debt as seen by more than average maturities in the first quarter of 2021.
Maturities in the first quarter of 2021 total Sh410 billion against a quarterly average of Sh293.7 billion in the last half of 2020, a significant 53.5 per cent amount of the redemptions in the 364-day T- bill tenor.
For this reason, the government is expected to issue more longer dated bonds to extend maturities and reduce strain on its balance sheet, especially at a time when interest payments are chewing an estimated 30 per cent of revenue collections.
“Therefore, the least path of resistance to lengthen the debt profile will be issuance of new issues or re-opening of longer-dated issues,” said Churchill Ogutu, head of research at Genghis Capital.
“The short-end of the curve is crowded hence investors should seek opportunities at the belly of the curve,” he added.
Demand is coming from foreign and local investors who are dumping stocks in search of stability.
An almost nonexistent secondary market is making the situation worse as it is not easy to sell long-term bonds.
Demand for fixed income is expected to prevail in the year as election jitters chase investors away from the stock market even as banking stocks battling to shed the effect of high non performing loans.
Five year bonds returns an average of 11.5 per cent while 10-years bonds are returning about 13 per cent per year compared to 91-days bills at 6.8 per cent and 184-days bills at 7.5 per cent.