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By CHARLES MWANIKI

Posted  Monday, May 2   2016 at  18:46

Interest rates on short-term government debt have continued coming down in the latest auctions following heavy bidding as the money market continues to experience high liquidity.

Latest Central Bank of Kenya (CBK) data show investors bid Sh43.1 billion for the Sh16 billion worth of 91,182 and 364-day Treasury bills on offer last week.

Rates on all three came down marginally to 8.5, 10.5 and 11.7 per cent respectively. The liquidity in the market has been boosted by government payments, redemptions of government securities and reverse repos purchases in aid of smaller banks.

CBK uses reverse repos (which is a borrowing instrument backed by government securities held by banks) to provide liquidity to any lender that might be struggling for funding on the interbank market, while repos are used to mop up liquidity from the banking system.

READ: T-bill rates fall as CBK boosts liquidity

According to Kestrel Capital, the inbuilt liquidity in the market will enable the huge subscription rates to persist going forward.

There has also been flight to safety by investors towards government securities in reaction to the placement of Chase Bank under receivership by CBK earlier this month.

“The disruption from quarterly tax remittances and corporate dividend season will place pressure on the regulator to continue helping the banking industry with liquidity while keeping a firm eye on any potential currency weakness,” said Kestrel Capital head of fixed income Alexander Muiruri in a domestic borrowing report last week.

“These factors might encourage speculative bidding in debt auctions but we believe the flight to government yields (safety) will take the day in tandem with continued foreign demand for infrastructure bonds.”

Depositors reacted to the third case of a local bank failing in the past 10 months by shifting their money to bigger lenders, and at the same time looking more favourably at government securities as an option for longer-term saving.

The treasuries are also offering rates that are higher than the average fixed-deposit rate of about eight per cent.

Genghis Capital fixed-income analyst Vinita Kotedia says that secondary market fixed income trades have also ebbed, with traders favouring primary T-bill investments instead.

In spite of the high liquidity, the shilling has remained stable exchanging at a range of 101.10 and 101.45 to the dollar last month. Usually a highly liquid money market would put pressure on the shilling’s exchange rate to the dollar.

 
   
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