Treasury breathes a sigh of relief as cost of public debt falls

The Treasury building signage. The 20-year paper is the longest treasury security to have been issued in the past 18 months. Photo/File 

By GEOFFREY IRUNGU

 

''So we expect pension funds and insurance companies will be very keen on the paper,” said Alexander Muiruri, a dealer at African Alliance Investment Bank.

 

Stabilising interest rates have emboldened the Treasury to test investors’ appetite for long-term debt after a year of market volatility that has seen the government prefer to issue short-term bonds for fear of being locked in expensive debt.

The Central Bank of Kenya (CBK) has advertised the sale of a Sh12 billion 20-year bond at an indicative interest rate of 12 per cent.

The coupon rate is an indication of the extent to which interest rates have fallen and stabilised since about a year ago when the cost of a two-year treasury bond shot up to more than 20 per cent after regulator increased its policy lending rate to cushion the rapidly depreciating shilling and tackle run-away inflation.

“We are likely to see significant appetite for the bond, but that might also mean investors will not be very ambitious in the search for yields. They may be a bit conservative,” said John Kamunya, a research analyst at Sterling Investment Bank.

The 20-year paper is the longest treasury security to have been issued in the past 18 months.

In September, the government issued a 15-year bond that was oversubscribed as bids totalled Sh23 billion against Sh15 billion that the Treasury was seeking.

Success of the 20-year bond could further signal the return to normality in the financial markets. The last 20-year bond was sold in May last year at an indicative rate of 10 per cent.

Mr Kamunya, however, said there are mixed signals on the likely investor appetite for the bond given the fluctuations in interest rates on the short-term papers such as the Treasury bills.

He said institutional investors seeking to balance out their portfolios with longer-term bonds may warm up to the issue.

Another analyst who declined to be quoted said he saw the bids clustering around a one percentage point (100 basis points) above the coupon, predicting the average yield could be about 13 per cent.

This will also be in line with the yield of the similar paper in the secondary market which is between 12.50 and 13.10 per cent, as shown in the latest data from the Nairobi Securities Exchange on implied yields.

“The bond is coming at the right time because inflation has come down, inter-bank rates are where they were mid last year when the last such paper was floated. So we expect pension funds and insurance companies will be very keen on the paper,” said Alexander Muiruri, a dealer at African Alliance Investment Bank.

The Treasury mostly opted to offer Treasury bills and bonds of not more than two years during the past one year.

Currently, the highest coupon of 22.84 per cent is on the two-year paper that will mature in November 2013. The next most expensive issue is a one-year paper offered at a coupon rate of 21.81 per cent and set to be fully redeemed next month