Week ending 22nd March 2019
Pervasive and systemic risks stemming from the global economic downturn has contributed to a shift to easier monetary policy either in the form of delayed normalization or outright policy rate cuts. It was therefore no surprise when the US Federal Reserve and UK monetary policy committee (MPC) committed to keeping their policy rates unchanged. While this shift relieves pressure off many emerging and developing economies, their respective central banks remain cautious of evolving global trends and the possible impact of contrarian monetary policy.
In Kenya, the subdued inflation outlook, which is likely to remain low through the year, will support the widely expected unchanged monetary policy stance in the upcoming MPC meeting. Additionally, shifting expectations stemming from the amendments to the law capping interests will warrant central bank caution within the 12-month suspension of the ruling against the ‘unconstitutional’ law.
The impact on market rates from potential amendments to the law capping interest rates could see reduce appetite for longer dated papers given potential losses. The poor performance on Treasury bond auctions, particularly those with durations greater than 10 years, may confirm this position. This was underscored by the underperformance of the 25-year IFB auctioned during the week – in spite of the attractive tax-exempt status and the favorable liquidity standing. The bond received KES 29.38Bn against the KES 50.00Bn on offer with KES 16.30Bn being absorbed at 12.655%.
Treasury remains reluctant to reliably shorten its debt maturity profile despite market signals for preference on the shorter end of the yield curve. This is despite having to plug in close to 40% of its domestic debt target amid heavy upcoming maturities. That said, Treasury will in early April revert to a dual bond issue seeking to raise a total of KES 50.00Bn through a new 10 and 20-year bond. Given the persistent heavy liquidity against lackluster investment opportunities, we expect the auction to receive healthy subscription though with a bias on the shorter tenor.
Meanwhile, Treasury absorbed KES 34.98Bn in funds from an oversubscribed T-bill auction. Yields were mixed at 7.697% (Up 86.00bps), 8.226% (Down 4.40bps) and 9.409% (Down 3.00bps) on the 91, 182 and 364-day papers respectively. Most notable was the uptick in the 91-day T-bill rate, which we assume is a result of aggressive bidding from a small number of players.
In other news, heavy liquidity, primarily stemming from Treasury maturities, continues to weigh on market rates. The overnight rate fell below 3.00% to 2.31%, down 73.00bps, on Friday. The central bank sought to balance liquidity conditions with a KES 60.00Bn withdrawal of excess liquidity. The issue of a 14-day repo on Friday could signal that liquidity conditions indeed remain ample.