Yields seen rising at Kenyan T-bond sale

NAIROBI: Yields on Kenyan Treasury bonds on auction this week are expected to rise, with the five-year paper seen jumping the most due to pressure from recent surges in 91-day and 182-day bill rates, traders said.

Government debt yields have hit double digits in the last six months amid tight domestic market liquidity, inflation which was 13 percent in May versus 4.5 percent at end-2010 and a view the central bank is behind the curve in curbing price rises.

There has also been a perception the central bank would accept low bids to meet funding requirements as the fiscal year ends on June 30. Kenya is set to seek more foreign donor funding from July in a bid to lift pressure on the domestic bond market.

"Already most of our investments are earning negative real returns in comparison to inflation. I guess inflation will rise, but may not spike. So, if you are looking at inflation, you will definitely bid higher," said Mutahe Karuoro, fixed income and money markets trader at Co-operative Bank.

While double-digit yields have made Kenyan debt more attractive, the shilling's slide to record lows against the dollar and a reduction in risk appetite due to the Greek crisis is likely to keep foreign investor participation low.

The central bank will sell 20-year, five-year and two-year bonds worth up to 18 billion shillings ($200 million) on Wednesday, the final scheduled bond sale of the fiscal year.

Five-year bonds were last sold in the primary market in March and traders said bidders would be seeking high yields given the jump in shorter-dated yields and rising inflation.

"This paper hasn't been issued in a while. So we'll expect a jump on the five-year, as the yield corrects in line with where the yield curve has now shifted," said Peter Njuguna, head of fixed income and money markets at Kenya Commercial Bank.

At the last five-year primary sale its weighted average yield rose to 8.5 percent from 7.6 percent previously. The paper is trading at about 11.75 percent and traders predicted yields of 12.5 percent to 15 percent at the auction.

"There will be a bit of price discovery. We have seen a lot of changes on the interest rate scene, so investors might expect to be paid better," said Duncan Kinuthia, fixed income trader at Commercial Bank of Africa.

Yields on 91-day and the 182-day Treasury bills have surged this year, even though rates slowed slightly at the last sale.

The 91-day bill yield dipped to 9.006 percent last week from 9.016 percent and that on the 182-day paper slipped to 9.906 percent from 9.949 percent previously.

"We started seeing the short end of the yield curve ticking very fast to a point where they were going to overtake the long end of the curve," Kinuthia said.

At last month's auction, the yield on the 20-year bond rose to 13.974 percent from 13.691 percent in December 2009, while that on a two-year bond jumped to 10.387 percent from 7.439 percent in April.

The 20-year paper is trading at about 14.45 percent, while the two-year is trading at 11.15 percent.

Traders said they expected the yield on the 20-year paper to come in at between 13 percent and 16 percent, and predicted a range of 11.4 percent to 13.5 percent for the two-year paper.

The 20-year bond has a 10 percent coupon, the five-year is at 6.671 percent and the two-year has a 7.439 percent coupon.

Traders said they expected the bond sale to be just fully subscribed, at best, with most attention going to the two-year paper, then the five-year and the 20-year.

"I see the uptake being (on the two-year). I expect it to be fully subscribed, because the bonds are well-diversified in terms of tenors," said Njuguna at Kenya Commercial Bank.

Fixed-income traders added that rising overnight lending rates would also send yields higher. Weighted average overnight lending rates stood at 6.25 percent on June 20, up from 5.31 percent a month before.

The central bank said in its weekly report that due to tight liquidity, in the week ended June 17 commercial banks borrowed 56.4 billion shillings from its overnight window, up from 30.04 billion in the previous week.

"People are borrowing more from the window than from the market. Of course, if anyone is going in, most will bid aggressively," said Karuoro.

Copyright Reuters, 2011