Record-high Treasury bill rates set stage for expensive loans

The National Treasury building in Nairobi in this picture taken on March 15, 2023. PHOTO | DENNIS ONSONGO | NMG

Treasury bill interest rates have crossed the 15 percent mark for the first time in eight years, setting the stage for a further rise in the cost of loans.

The rates on T-bills are a key indicator of the risk-free floor for the pricing of loans, with banks tending to adjust both deposit and lending rates upwards whenever the T-bill yields go up.

In last week’s auction, the yield on the 364-day T-bill went up by 49 basis points to hit 15.22 percent, the highest seen since November 2015.

Read: T-bills expand edge over fixed deposit returns

The rates on the 182-day and 91-day papers are lying just shy of the 15 percent mark at 14.94 percent and 14.79 percent respectively.

In the sale that targeted Sh24 billion the Treasury raised Sh18.8 billion, out of which Sh15.5 billion came out of the 91-day T-bill, indicating continued investor uncertainty over interest rates and risk towards lending to the government.

Aside from the pressure on the taxpayer due to the higher T-bill rates raising the cost of public debt, bank loan borrowers will also be wary of the higher interest rates filtering through to their facilities in a period of economic difficulties that have made it more challenging to service loans.

“As T-Bill rates continue to climb, it is expected that banks will respond by adjusting their deposit and lending rates to align with the higher borrowing costs. By increasing deposit rates, lenders will be aiming to attract investors and stay competitive in comparison to other investment assets,” said Stacy Makau, an analyst at investment bank AIB-AXYS Africa.

The insistence on higher rates by investors is partly due to a wait-and-see attitude towards the pledge by the government to cut domestic borrowing in the current fiscal year to Sh411 billion from the budgeted Sh586.5 billion.

Earlier, the Central Bank of Kenya (CBK) had pointed to an even higher cut in borrowing — to Sh386 billion— before an upward revision of the recurrent budget.

“Despite revising down its net domestic borrowing target for the current fiscal cycle in favour of an expected Sh270 billion in external financing inflows, markets are not yet convinced that this will turn out as expected. So far, the market has not sighted these external financing inflows,” said analysts at NCBA Bank in a fixed income note.

Expectations around inflation are also playing a part in the pricing of bids in the securities auctions, especially in light of comments by the CBK governor Kamau Thugge that the rise in fuel prices this month has hit expectations of a softening of fuel inflation starting next month.

Read: Treasury bill sales perform poorly on reduced liquidity

For investors, this has signalled a rate hike or at least a hold on the 10.5 percent Central Bank Rate in the October Monetary Policy Committee meeting.

Some could, therefore, be pre-emptively pricing this into their pricing of bids in the securities auctions.

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