Fixed Income Report - September 2019 -Market Liquidity Reigns Supreme
The Central Bank of Kenya (CBK) has re-opened two fifteen year bonds FXD1/2018/15 and FXD2/2019/15 targeting KES.50Bn for budgetary support.
This is the third bond issuance in the 2019/20 fiscal year with the previous two issues receiving KES.154.1Bn against a KES.90Bn target testimony of high demand for Government debt.
Our report titled “Market liquidity reigns supreme” illustrates the impact of high market liquidity as shown by low inter-bank rates, high commercial bank liquidity and low private sector credit.
The recently released commercial bank results show relatively high demand for Government securities as has been the trend since the introduction of interest rate caps with modest loan book growths recorded.
In terms of expected yields on the issues, we predict the Weighted Average Rate (WAR) of bids at between 12.30 and 12.50% for FXD1/2018/15 and a weighted average rate of accepted bids at 12.40%. For FXD2/2019/15 we expect bidding at between 12.50% to 12.60%, with the weighted average of accepted bids at around 12.50%.
On demand for the issues, we expect a combined subscription rate of 60% (KES.30Bn) on account of temporary tightening liquidity.
We review National Treasury accounts for both the 2018/19 and 2019/20 fiscal years. The 2018/19 accounts show that the Government revised its domestic borrowing target upwards after revising Total tax income target downwards, a likely scenario in 2019/20.
The report further highlights secondary trading activity which declined significantly in August. We expect an increase in trading activity as market liquidity eases towards the end of the month courtesy of Central government allocations to the counties.
On Macro-economics, we forecast an inflation rate of 4.5-5%% in September a decline from August.
On monetary policy, the Monetary Policy Committee (MPC) meets on 23rd September where we expect no revision to the Central Bank Rate (CBR). Download Report