Investors shy away from state bonds despite rising yields

Investors are shying away from government papers despite the rising yield curve.

The new 25-year bond whose bidding closed on Tuesday attracted bids of Sh14.9 billion against a target of Sh20 billion to represent a 74.47 per cent performance rate.

According to the auction report, the exchequer accepted Sh13.7 billion, taking total nettings from bonds on offer this month to Sh28.8 billion after the mobilisation of Sh15.1 billion from two previously reopened bonds.

The amount raised is 48 per cent of the target of raising Sh60 billion from Treasury bonds in October.

The weighted average rate of accepted bids for the new 25-year paper settled at 14.188 per cent, the highest rate issued on the bond in the past decade. 

The recently re-opened 10 and 15-year papers whose auction closed on October 4 had a performance rate of just 47 per cent, mirroring a trend of investor snubs over recent months.

The auction comes at a time when the State has been struggling to raise its targeted amounts from the local debt market. September’s issuance targeted Sh50 billion raising Sh39.02 billion from bids of Sh46.1 billion.

In the first two months of the fiscal year (July and August), the government issued three bonds seeking a total of Sh110 billion, but only managed to raise Sh54.2 billion.

A financial market analyst Daniel Asege has attributed the low appetite for government papers by investors to attractive offers in developing countries and competition for credit by the private sector. 

''Commercial banks are looking outside for higher yields on the appreciating dollar. The private sector which is recovering from a number of uncertainties is also thirsty for loans,'' Asege said. 

According to him, the risk-based lending adopted by banks and the rising interest rate is likely to deny the government more domestic loans.

''Investors are however going for short-term government papers like Treasury Bills and bonds with lower tenors. The previous auction saw a five-year bond priced at 12.99 per cent. It was oversubscribed,'' Asege said.

Jerry Momanyi says banks, which are the biggest holders of government debt, have been wary of taking on new bonds due to valuation losses on their holdings when secondary market yields are going up. Bond prices or valuations fall when yields rise.

He adds that there has also been little in the way of foreign investor interest in the local securities market, given the higher rates on offer in the US, which is deemed a safe haven in times of global economic uncertainty.

The reduced investor appetites for the government Treasury are expected to derail the government’s domestic borrowing programme for the 2022/23 fiscal year.

The government intends to borrow Sh1.040 trillion in the current fiscal year to June 2023 but is behind the targeted rate run having mobilised only Sh95.7 billion in three months through to the end of September.

It is targeting to borrow Sh578.6 billion from the domestic market and the balance from the external debt market. 

The rising yield curve on government papers is rising at the time the country is looking for low-cost debt to ease pressure on the total public debt which is currently at Sh8.6 trillion or 70.1 per cent of GDP. 

The yield curve is threatening to scale to levels last witnessed in 2011 where they rose to a high of 22 per cent. 

On Wednesday, the issue of high-interest rates on domestic debt came to haunt Treasury Cabinet Secretary nominee Njuguna Ndung'u who was at the helm of the apex bank during the Late President Mwai Kibaki's administration. 

He said he will favour concessional loans to buy off domestic debt and trigger a turnaround in the "terrifying" economy.

Commercial banks are owed Sh2 trillion, Sh2.1 trillion is owed to non-banks and non-residents, and another Sh85 billion to the Central Bank of Kenya.

Last year, domestic interest costs across the 2021-22 financial year stood at Sh456.8 billion or 79.1 per cent of total interest costs. Foreign interest costs were Sh120.8 billion.

Domestic interest costs represented an estimated 22 per cent of total recurrent expenditure for the period.

Loan financing will remain a burden on the exchequer in this financial year, with internal debt redemptions - rollovers in the year to June 2023 — estimated at Sh461.4 billion.

President William Ruto's government has committed to slashing the current budget by Sh300 billion as a way of limiting debt accumulation.