February Treasury bonds attract fewer takers as liquidity dries up

Central Bank of Kenya. FILE PHOTO | NMG

By ELIZABETH KIVUVA
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Summary

• The Central Bank of Kenya (CBK) received Sh41.86 billion bids out of a Sh50 billion target for the dual tranche bond that consisted a 15-year paper first sold in 2013 and 20-year paper whose initial sale was in 2012.
• This means the effective tenor for the two papers is 7.1 years and 11.8 years, respectively.
• CBK took up Sh32.12 billion at the rate of 11.25 per cent and 12 per cent for the two bonds respectively.

Investors undersubscribed this month’s Treasury bond sale by 16.3 per cent, blamed on tighter liquidity and saturation of medium tenor papers in the market.

The Central Bank of Kenya (CBK) received Sh41.86 billion bids out of a Sh50 billion target for the dual tranche bond that consisted a 15-year paper first sold in 2013 and 20-year paper whose initial sale was in 2012.

This means the effective tenor for the two papers is 7.1 years and 11.8 years, respectively.

CBK took up Sh32.12 billion at the rate of 11.25 per cent and 12 per cent for the two bonds respectively.

“The CBK has reopened a lot of bonds with a maturity profile of about seven to eight years resulting in a perceived oversupply of the tenors. This has left little room for capital appreciation, making these tenors unpopular with investors, and we believe this to be the reason for undersubscription of the bonds,” said Sterling Capital in a note on the bond results.

The bond was marked for budgetary support, but part of the proceeds will be used to retire a maturing Sh7.87 billion debt from an infrastructure bond that was sold in 2009.

The undersubscription was also linked to the liquidity mop up effect of the January 16-year infrastructure bond sale, which saw investors bid a record Sh125.3 billion against a target of Sh50 billion.

The government took up Sh81 billion from the paper.

Analysts at Genghis Capital said that the excess bids that were rejected were subsequently taken into the secondary market.

“The infrastructure bond played a major role in mopping the excess liquidity that was salient at the start of the year…We thus believe investors who missed out at the primary auction took opportunities in the secondary market,’’ said Genghis Capital in their pre-auction note for the February bond.

Aanalysts now expect that the undersubscription will trigger a tap sale later this month to cover for the expanded domestic borrowing target of Sh572.7 billion.