Why T-bills Dropped Below 10% For The First Time Since April And What Next
The interest rate on Kenya’s 91-day Treasury bill dropped below 10% for the first time since April 2023, reflecting a broader decline in returns on government securities. This shift is primarily due to recent cuts in the Central Bank of Kenya (CBK) base interest rate, which dropped from 13% to 11.25% between August and December 2024.
Why This Is Happening:
- CBK Rate Cuts: The CBK has progressively reduced its base interest rate to stimulate economic activity. Lower base rates generally translate to reduced returns on government securities, as they align with the central bank’s policy direction.
- Market Adjustment: Investors had rushed to lock in higher returns earlier in the year, anticipating rate cuts. However, as rates have declined, the demand for Treasury bills (T-bills) has eased, resulting in lower subscriptions for recent auctions.
- In the latest auction, only KSh 13.08 billion was offered against a target of KSh 24 billion.
- Net returns, after a 15% withholding tax, have fallen into single digits, making T-bills less attractive compared to previous months.
Recent Trends in T-bill Rates:
- The 91-day T-bill rate dropped from 10.03% to 9.95%.
- The 182-day T-bill rate rose slightly from 10.00% to 10.02%.
- The 364-day T-bill rate fell from 11.75% to 11.53%.
Broader Impacts on the Market:
- Falling Yields Across Securities: The decline in T-bill rates mirrors a broader trend in the sovereign debt market, where even long-term bonds are offering reduced returns. For instance, a 10-year bond issued in December had an effective return of 14.68%, lower than its 16% coupon rate.
- Impact on Investors: While investors who locked in higher rates earlier will continue earning those returns until their securities mature, reinvestment opportunities will now yield lower returns.
- Retail Investor Participation: Retail investors, including individuals, Saccos, and institutions, have significantly increased their holdings in T-bills, now controlling 56.2% of the market. This shift has been driven by high rates previously available and the convenience of the CBK’s Dhow CSD digital platform, which has simplified investing in government securities.
Context of Investment Shifts:
In recent years, high T-bill rates attracted retail investors, especially during a period when other asset classes like equities and real estate offered lower or negative returns.
However, with the CBK’s continued push for lower interest rates, government securities are becoming less lucrative, signaling a potential shift in investment preferences going forward.
