Investors are expected to pile into a 15-year Kenyan bond issue on Wednesday, the country’s first offering of long-term debt in more than a year, as they seek to lock in yields which are falling now that inflation and interest rates are declining.
The sale is expected to confirm that the yield curve has returned to normal after short-term yields fell below long-term yields last month.
Analysts expect strong demand from fund managers and insurance firms at Wednesday’s sale of the 15-year bond and see the weighted-average yield falling to 10-11 percent.
At the last 15-year bond auction in April 2011 the yield rose to 12.388 percent, from 10.923 percent previously.
The Central Bank of Kenya, which has rationed long debt securities since the middle last year as it waited for yields to fall further, plans to sell up to 15 billion shillings of the 15-year issue, with a fixed coupon rate of 11 percent.
“The market is very liquid and investors will be bidding cautiously (lower rates). We expect high subscriptions from funds and insurance investors,” said Caleb Mutai, a fixed income trader at Tsavo Securities.
“The yield curve is changing from the inverted position we saw last year. It will correct further as yields on the lower end keep falling.”
For the past year, yields at the short end of the curve had been above those of long-term paper as inflation soared, reaching nearly 20 percent in November 2011.
Yields have since come down after the central bank adopted an aggressive tightening stance and reined in inflation. Falling inflation has prompted the bank to cut interest rates since July to support the economy, putting further pressure on yields.
The benchmark 91-day T-bill yield has dropped from a high of 20.8 percent on January 19 to 7.5 percent at a sale last week.
Interest in the 15-year bond issue is likely to distract investors from T-bill sales this week, analysts said.
“Investors are looking for medium to long-term investments, that’s why we expect the yield on the 91- and 182-day bills to stabilise because investors will be focused on the 15-year bond,” said Ronald Lugalia, a research analyst at Afrika Investment Bank.
“It’s a timely move by the central bank to offer the paper now after inflation has fallen significantly,” he said.
Yields on 182-day and 91-day Treasury bills, due to go on sale on Wednesday and Thursday respectively to raise a combined 8 billion shillings are expected to be stable in low demand.
A T-bill auction last week was undersubscribed and yields on the benchmark three-month bill fell 29 basis points to 7.515 percent, while the yield on six-month paper slipped to 8.993 from 9.351 percent previously.