Investors have committed Sh181.4 billion to three-month Treasury bills (91-day T-bills) over the last 10 weeks, significantly increasing demand for short-term government debt instruments.

This surge in uptake presents a challenge for the National Treasury, which faces substantial repayments due by mid-August. The previous 10 auctions from March to May raised only Sh67 billion for the same tenor.

Investor Preference for Short-Term Paper

Since mid-May, market participants have favored the 91-day T-bill over longer maturities, seeking flexibility amid expectations that interest rates may continue to rise. By investing for just three months, investors can reinvest at potentially higher yields if rates increase.

Impact on Treasury and Debt Management

The large volume of short-term debt maturing simultaneously puts pressure on the Treasury to find Sh181.4 billion to repay investors or convince them to roll over their investments into new securities. Typically, heavy maturities prompt investors to demand higher interest rates to refinance or postpone repayments.

Kenya's public finances have felt the strain from sizeable foreign and domestic debt payments, leading to delayed disbursements to counties and contractors.

Market Dynamics and Auction Performance

  • In the last 10 auctions, the 91-day T-bills attracted bids totaling Sh262.3 billion against a government target of Sh52 billion, with the Central Bank of Kenya (CBK) accepting Sh181.42 billion.
  • The 182-day bills raised Sh59 billion from Sh63.9 billion in bids, falling short of the Sh100 billion target.
  • The 364-day paper also underperformed, raising Sh57.8 billion against a target of Sh100 billion.

This shift toward short-term securities contrasts with the March-May period when longer tenors dominated subscription.

Risks of Concentrated Maturities

The CBK prefers balanced issuance across tenors to spread maturities evenly throughout the fiscal year and reduce refinancing risk. Heavy concentration on one tenor risks creating large repayment obligations within a short timeframe.

In 2017, the Treasury faced a refinancing crunch due to excess demand for 182-day T-bills, prompting the CBK to suspend issuance of the six-month paper temporarily to redistribute investor appetite.

Debt Strategy and Outlook

The government withdrew a previous proposal to phase out the one-year Treasury bill, aiming instead to reduce debt maturing within one year and lengthen average loan maturities.

Over five years, efforts to lower refinancing risk have reduced the share of domestic debt in T-bills from 34% in June 2019 to 15.31% (about Sh1.12 trillion) as of last week. Bonds now make up 82.15% (Sh6.02 trillion) of domestic debt, with total domestic debt standing at Sh7.33 trillion.