BODO: Stop celebrating, low Treasury bill rates will not last

The current corrections in the shorter end of the yield curve, or short term interest rates, are temporary. About a month ago, the government sold 91-day Treasury bills at 22.5 per cent and 182-day Treasury bills at 22.3 per cent.

At the moment those rates have plummeted to 9.65 per cent and 10.2 per cent respectively. It’s all short-lived, and here’s why.

First, the government’s mountain of bills keeps on piling up. In November and December alone, Treasury bills worth Sh70 billion and a further Sh40 billion in Treasury bonds are maturing. That’s a total of Sh110 billion in maturing debt that will need to be redeemed before the year ends. Between now and end of November, a total of Sh27 billion in Treasury bills and bonds is maturing, while in December, the figure balloons to Sh60 billion in maturities.

The government will need to refinance a significant portion of this. We wait to see just how long Treasury will wait before picking more money from the local debt market at previous peak rates.

Regarding monetary policy, the Central Bank may not be able to keep pumping liquidity into the banking system for a long time. The idea behind it was noble. After the collapse of Imperial Bank, a lot of the mid tier and smaller banks recorded significant flight of deposits to their much larger peers.

In fact, in the succeeding weeks, the overnight interbank market, a key lifeline for any bank seeking to fill a funding shortfall in its books, nearly came to its knees. Liquidity was skewed in favour of some of the large banks.

The Central Bank felt the need to redistribute liquidity fairly in the system, hence he reverse repos, the first of which was conducted on October 21. The CBK has since pumped in nearly Sh120 billion, in gross terms.

It was all meant to be a temporary move but the regulator seems to have been caught in a cycle of having to either keep re-funding or rolling over.

The underlying problem that prompted the reverse repos has not fully dissipated, and the mid tier and smaller banks that were worst affected by the deposit flight may still not be able to breath for long if CBK withdraws liquidity support.

The support of the Central Bank is most likely not open ended the regulator will have to glide it down at some point.

On the fiscal side, the government’s current position is too precarious to support low rates for a prolonged period.

At the close of the first quarter of 201516, the fiscal deficit on core revenues stood at Sh58 billion. This is too high. The Treasury has had to tap into the dollar debt market for a second time. And due to the cycles in tax receipts, a similar level of deficit may still easily re-occur in the second quarter.

Treasury can’t keep borrowing externally every time there is a mounting deficit. There is an upper bound on the non-concessionary foreign currency debt financing in any given fiscal year.

Finally, global cross currents are about to wash ashore, and top of the list is the US, where the domestic absorption rate in its economy has picked up, going by the October 2015 unemployment figures. This now brings forward the timing of a possible Fed rate liftoff to December.

Such a liftoff would see frontier markets like Kenya brace for a counteractive defensive play on the monetary policy front. Interest rates will definitely have to be pushed up to incentivise any exposures to local-currency priced assets and narrow any opportunity costs.

Therefore, we are likely to see a slow reaction to calls for commercial banks to withdraw their earlier upward loan repricing notices.